Centrica Annual Report 2009

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Centrica plc Annual Report and Accounts 2009 Centrica plc plc Centrica England in registered Company and Wales 3033654 No. Millstream, office: Registered Windsor, Road, Maidenhead Berkshire 5GD SL4 www.centrica.com Directors’ Report – Business Review Directors’ Report – Governance Financial Statements Shareholder Information Communications. Communications. derivative 111-114 78, fair value 119-123 78, hedge accounting 114 78, analysis of shareholders 164 called up share capital 123-124 funds 158 44 shareholdings material prices 163 TSR (total shareholder return) 8 EPS (adjusted earnings 98-99 per share) 8, 27, employee 129-134 73, Executive 129-130, share-based payments 129-135 Financial instruments Financial Financial Review 27-28 IFC, Five-year record 160 Fixed fee service contracts 148 FSA (Financial Services 71 Authority) 24, 12, 30Fuel poverty 24, 12, Gas and liquids reserves 159 81, Gas Balancing Alerts 17 6, Gas exploration 14-15 6, 20 Gas production 14-15, 6, Generation Green 12 Goodwill and 100-105 other intangible 81, 76, assets 74, Green 24 Streets 12, Group Financial Statements 62-67 Health, safety and environment (HS&E) 32 25, 3, Income Statement 62 Interest 95 68-69 Standards Reporting Financial International Inventories 109 Joint ventures and associates 107-109 Key performance indicators (KPIs) 8-9, 22-26 Liquefied23 natural 15-16, gas (LNG)6, 30, 21-25, 13, 10, 4-7, carbon 2-3, Low Mature and orphaned 33 assets 14, 6, Microgeneration 29 22, 6, Minority interests 126 79 30, 32, 25, 23, 15, 9, Nuclear 4-7, 3, Outsourcingand offshoring 34 26, Pensions 33, 136-139 33 30, 31, 27-28, 23-24, 20, 18, Prices, wholesale 13-16, and retail 4-7, 2, Principal undertakings 150 Procurement 26 Property, plant and equipment 106 Provisions 118 Related party transactions 44 Renewables Obligation Certificate15 (ROC) 30 Renewables 15-16, 9, Reserves 20 14, 6, 5, 2, Rights Issue 27 Risk Management 29-34, 82-86 Segmental analysis 87-93 162 information Shareholder Shares schemes Shares Smart 31 29, meters 22, 5-6, 12, Statement of Changes in Equity 66 Strategic Priorities 5-7 3, Supply chain 26 Tangible fixed 155assets Taxation 96-97 payablesTrade 115 receivablesTrade 110-111 Vulnerable 30 customers 23-26, 12, This report hasand been printedfibre on Greencoatvirgin Free 80 Velvet, whichChlorine is madeTotal from 10% fibre, post-consumer recycled 80% independently been has paper This fibre. Free Chlorine Elemental 10% (FSC). Council Stewardship Forest the of rules the to according certified Designed and produced 35 by Wilson. Andy and Fawell Charlie by Photography certified FSC ISO14001, Ltd, Press Westerham Ives St by Printed CarbonNeutral®. and Index re-appointment 44 remuneration 97 report the to members of Centrica plc 60, 151 Company, notes 152-158 Group 64 80 75, 30, 31, North America 19 18, 30 5, UK 2, NPS (net promoter 24 score) 12, 9, 18-19 numbers 10-13, 34 30, 32, 23-24, service 10-13, 36-37, biographies indemnities 39, directors’ disclosure of information auditors to 43 emoluments 53, 95 pensions 58 38-39 re-election remuneration policy 47-54 43 responsibilitystatement service contracts 52 54-58 share interests 47-51, training 39 costs 95 25-26 engagement 12, 10, 9, 95, 25, 13, numberIFC, pensions 76 25-26 policies Accounting policies 68-82, 28, 153-154 139-142 74, Acquisitions, 70-71, 28, 14, business12, combinations 11, 4, 2, Alternative Formats 164 Assets and liabilities 64, 160 27, Auditors 26 25, Awards 12, 5, Sheet Balance Board of Directors 36-37 2-3, Borrowings, bank overdrafts, loans and others 116 31 29, 26, 24-25, 22, British Gas 4-6, 10-13, 2, 9, Business principles 32 26, 22, 3, Capital Management 87 28, 21-25, 15, 13, 10, 9, 4-7, 2, emissions, low Carbonintensity, Cash and cash equivalents 115 160 127-128, Cash 67, Flow Statement 27, CCGT (combined cycle gas turbine) 15 5, 23 Centrica Energy 14-16, 5, 2, 23 Centrica Storage 17, 6, 5, CERT (Carbon Emissions Reduction scheme) Target 73 22, Chairman’s Statement 2-3 44 26, donations political and Charitable Chief Executive’s Review 4-7 Climate 30 29, change 22-23, 9, 4, Combined code on corporate governance 38-43 Commitments, contingencies and indemnities 145-147 40-42 Committees 36-37, 21-22, 26 Communities 24, 21, 3, Competition operationsContinuing93 Corporate governance 36-43 32 21-26, responsibility Corporate Cost of sales 72 44 policy payment Creditor Customers Deferred corporation tax liabilities and assets 117 33 Direct 24-25, 22, Energy 18-20, 5, 2, Directors 97 8, 2, DividendsIFC, 29-34 Electricity 27, 21-23, 20, generation 5-6, 4, 15-16, 9, 162-163 Electroniccommunications IFC, 32 24-26, 21, Employees 10-12, 9, 3, ChainIFC EnergyValue 29-3126, 24, 22, 20, Energy efficiency12-13, 4-5, Energy 24 Ombudsman 11, Europe 30, 4-5, 143-144 29, Events after the Balance Sheet date 149 28, Exceptional items and certain re-measurements 94 27, Executive team 37 Financial calendar 164

‡ *

7 18 27 94 34 £m 147 147 (93) 183 168 233 595 444 profit Operating ‡

41 £m 551 196 567 406 1,150 7,843 ‡ 3,316 1,352 2,491 1,406 2,644 80% Revenue

15% 4%

Employees 1% North America ‡ * 55% Storage UK 8% 9% 28% Operating Profit Upstream UK 57% ‡ 28% 14% British Gas, Centrica Energy and Centrica Storage Centrica and Energy Centrica Gas, British Downstream UK Downstream UK: North America:Energy Direct Revenue 1% We own and operate gas-fired power stations in Texas and gas and oil assets assets oil and gas and Texas in stations power gas-fired operate and own We in Alberta. also We have a wholesale energy trading business. We are theWe biggest energy supplier domestic in Britain’s market. are largest Britain’s We operator in the installation and maintenance domestic of central heating and gas appliances. are leading Britain’s We supplier energy of and relatedservices businesses. to With assets primarily in the UK and Norwegian continental shelf, our activities include gas and oil production, development and exploration. own andWe operate eight gas-fired power stations, a have leading position in offshore wind and stake in a 20% British nuclear Energy’s fleet. have a growingWe LNG business and also manage a number legacy of gas supply contracts. procureWe gas and power for British Gas and other Centrica businesses. are theWe owner and operatorlargest Rough, of the UK’s gas storage facility. chosen in customers business small and residential to power and gas supply We deregulated states and provinces in North America. chosen in customers industrial and commercial to power and gas supply We deregulated markets across North America. provideWe energy related services across North America.

Storage UK NorthAmerica Residential energy supply Business energy supply and Residential business services Downstream UK Residential energy supply UK Upstream Upstream gas and oil Residential services Power generation Industrial and commercial Proprietary energy trading Upstream and wholesale energy Business energy supply supply energy Business and services The new new The shape of Centrica: restructuring We’re meet to business the demands modern the energy for ¥ 52% 21.7p (3.3)p 12.2p 2008 £911m

£661m

12.80 £(136m) Ω £2,003m £20.87bn

09 12.20

08 11.57

07 9.92

06 9.35 33% 2009 21.7p 16.5p 12.8p 05 Dividend per share pence £856m £1,111m £1,175m £1,857m £21.96bn

21,963 09

‡ 20,872

08 15,893

07 16,065 06

13,274 ^ Group revenue £m 05

‡

* 1,111

911 ^‡

includes net exceptional charges £nil) £568m of (2008: ‡ ‡

08 1,122

07 ‡ ^ 707

06 672 as above, except after other costs and joint ventures and associates stated net of interest and taxation from continuingServices operations Gas British in change and (Amendment) 23 IAS of adoption on costs borrowing with capitalise segment, to Energy restated European the present to and 2 note in explained as policy, recognition revenue Limited’s the exception of the operations Group’s in Germany, as a discontinued operation, as explained in note 38 restated reflect to the bonus element of the Rights Issue 2008in including joint ventures and associates stated gross of interest and taxation, and before other costs and and costs other before and taxation, and interest of gross stated associates and ventures items joint including exceptional and Investments Strategic from equipment and plant property, to uplifts value fair of depreciation and certain re-measurements

Adjusted basic earnings per share Adjusted operating profit Earnings ‡ ¥ Ω ^ A definition of the profit measures used throughout these results is provided in the Chief Executive’s Review on page 7. 7. page on Review Executive’s Chief the in provided is results these throughout used measures profit the of reconciliation a definition and A 6(b) note in provided is profit operating adjusted and profit operating between reconciliation A 14. note in provided is measures earnings the between *

Financial highlights Financial Revenue Our Performance UK the in are operations main Centrica’s of types two have We America. North and upstream. and – downstream business Financial Financial Highlights Full-year dividendFull-year per share £m Earnings Earnings/(loss) Effective tax rate Statutory results Operating profit Basic earnings/(loss) per share Operating profit 05 Directors’ Report – Business Review Directors’ Report – Governance Financial Statements Shareholder Information Communications. Communications. derivative 111-114 78, fair value 119-123 78, hedge accounting 114 78, analysis of shareholders 164 called up share capital 123-124 funds 158 44 shareholdings material prices 163 TSR (total shareholder return) 8 EPS (adjusted earnings 98-99 per share) 8, 27, employee 129-134 73, Executive 129-130, share-based payments 129-135 Financial instruments Financial Financial Review 27-28 IFC, Five-year record 160 Fixed fee service contracts 148 FSA (Financial Services 71 Authority) 24, 12, 30Fuel poverty 24, 12, Gas and liquids reserves 159 81, Gas Balancing Alerts 17 6, Gas exploration 14-15 6, 20 Gas production 14-15, 6, Generation Green 12 Goodwill and 100-105 other intangible 81, 76, assets 74, Green 24 Streets 12, Group Financial Statements 62-67 Health, safety and environment (HS&E) 32 25, 3, Income Statement 62 Interest 95 68-69 Standards Reporting Financial International Inventories 109 Joint ventures and associates 107-109 Key performance indicators (KPIs) 8-9, 22-26 Liquefied23 natural 15-16, gas (LNG)6, 30, 21-25, 13, 10, 4-7, carbon 2-3, Low Mature and orphaned 33 assets 14, 6, Microgeneration 29 22, 6, Minority interests 126 79 30, 32, 25, 23, 15, 9, Nuclear 4-7, 3, Outsourcingand offshoring 34 26, Pensions 33, 136-139 33 30, 31, 27-28, 23-24, 20, 18, Prices, wholesale 13-16, and retail 4-7, 2, Principal undertakings 150 Procurement 26 Property, plant and equipment 106 Provisions 118 Related party transactions 44 Renewables Obligation Certificate15 (ROC) 30 Renewables 15-16, 9, Reserves 20 14, 6, 5, 2, Rights Issue 27 Risk Management 29-34, 82-86 Segmental analysis 87-93 162 information Shareholder Shares schemes Shares Smart 31 29, meters 22, 5-6, 12, Statement of Changes in Equity 66 Strategic Priorities 5-7 3, Supply chain 26 Tangible fixed 155assets Taxation 96-97 payablesTrade 115 receivablesTrade 110-111 Vulnerable 30 customers 23-26, 12, This report hasand been printedfibre on Greencoatvirgin Free 80 Velvet, whichChlorine is madeTotal from 10% fibre, post-consumer recycled 80% independently been has paper This fibre. Free Chlorine Elemental 10% (FSC). Council Stewardship Forest the of rules the to according certified Designed and produced 35 by Wilson. Andy and Fawell Charlie by Photography certified FSC ISO14001, Ltd, Press Westerham Ives St by Printed CarbonNeutral®. and Index re-appointment 44 remuneration 97 report the to members of Centrica plc 60, 151 Company, notes 152-158 Group 64 80 75, 30, 31, North America 19 18, 30 5, UK 2, NPS (net promoter 24 score) 12, 9, 18-19 numbers 10-13, 34 30, 32, 23-24, service 10-13, 36-37, biographies indemnities 39, directors’ disclosure of information auditors to 43 emoluments 53, 95 pensions 58 38-39 re-election remuneration policy 47-54 43 responsibilitystatement service contracts 52 54-58 share interests 47-51, training 39 costs 95 25-26 engagement 12, 10, 9, 95, 25, 13, numberIFC, pensions 76 25-26 policies Accounting policies 68-82, 28, 153-154 139-142 74, Acquisitions, 70-71, 28, 14, business12, combinations 11, 4, 2, Alternative Formats 164 Assets and liabilities 64, 160 27, Auditors 26 25, Awards 12, 5, Sheet Balance Board of Directors 36-37 2-3, Borrowings, bank overdrafts, loans and others 116 31 29, 26, 24-25, 22, British Gas 4-6, 10-13, 2, 9, Business principles 32 26, 22, 3, Capital Management 87 28, 21-25, 15, 13, 10, 9, 4-7, 2, emissions, low Carbonintensity, Cash and cash equivalents 115 160 127-128, Cash 67, Flow Statement 27, CCGT (combined cycle gas turbine) 15 5, 23 Centrica Energy 14-16, 5, 2, 23 Centrica Storage 17, 6, 5, CERT (Carbon Emissions Reduction scheme) Target 73 22, Chairman’s Statement 2-3 44 26, donations political and Charitable Chief Executive’s Review 4-7 Climate 30 29, change 22-23, 9, 4, Combined code on corporate governance 38-43 Commitments, contingencies and indemnities 145-147 40-42 Committees 36-37, 21-22, 26 Communities 24, 21, 3, Competition operationsContinuing93 Corporate governance 36-43 32 21-26, responsibility Corporate Cost of sales 72 44 policy payment Creditor Customers Deferred corporation tax liabilities and assets 117 33 Direct 24-25, 22, Energy 18-20, 5, 2, Directors 97 8, 2, DividendsIFC, 29-34 Electricity 27, 21-23, 20, generation 5-6, 4, 15-16, 9, 162-163 Electroniccommunications IFC, 32 24-26, 21, Employees 10-12, 9, 3, ChainIFC EnergyValue 29-3126, 24, 22, 20, Energy efficiency12-13, 4-5, Energy 24 Ombudsman 11, Europe 30, 4-5, 143-144 29, Events after the Balance Sheet date 149 28, Exceptional items and certain re-measurements 94 27, Executive team 37 Financial calendar 164

‡ *

7 18 27 94 34 £m 147 147 (93) 183 168 233 595 444 profit Operating ‡

41 £m 551 196 567 406 1,150 7,843 ‡ 3,316 1,352 2,491 1,406 2,644 80% Revenue

15% 4%

£661m

12.80 £(136m) Ω £2,003m £20.87bn

09 12.20

08 11.57

07 9.92

06 9.35 33% 2009 21.7p 16.5p 12.8p 05 Dividend per share pence £856m £1,111m £1,175m £1,857m £21.96bn

21,963 09

‡ 20,872

08 15,893

07 16,065 06

13,274 ^ Group revenue £m 05

‡

* 1,111

911 ^‡

includes net exceptional charges £nil) £568m of (2008: ‡ ‡

08 1,122

07 ‡ ^ 707

Energy www.centrica.com/report2009

Gas and Liquids Reserves RecordFive Year Shareholder Information Index Notes to theNotes Company to Balance Sheet Independent Auditors’ Report – Group Financial Statements Group Financial Statements theNotes Financial to Statements Independent Auditors’ Report – Company Company Balance Sheet Corporate Governance Report Governance Corporate Other Statutory Information Remuneration Report Board Directors of and ExecutiveTeam Principal Risks and Uncertainties Directors’ Report – Governance Corporate Responsibility Review Group Financial Review Our Performance The new shape Centrica of Chairman’s Statement Directors’ Report – Business Review Chief Review Executive’s PerformanceKey Indicators Operating Review

2 4 8 4 10 10 21 21 27 27 62 62 29 29 38 44 36 68 61 61 60 45 35 151 151 152 152 159 159 153 153 165 165 160 160 161 more… For

future generations future Inside For now, and for for and now, For Positive

chosen markets energy company in our our in company energy leading integrated integrated leading Our Vision: To be the the be To Vision: Our Chairman’s Statement

Centrica performed well in 2009 It has been a transformational year for Centrica, delivering a stronger business both upstream and downstream. Roger Carr, Chairman

Centrica performed well in 2009. We have taken the opportunity In 2009, energy was once again presented by the low commodity price environment to address our never far from the headlines. UK energy hedge position. The acquisitions of Venture Production plc (Venture) and a 20% equity stake in British Energy have transformed Wholesale UK gas and electricity the Group, creating an upstream division that is a growth business in its own right. Our energy hedge position is now more closely aligned prices both declined sharply from with our competitors, but with the flexibility of our own gas production the levels seen during 2008 and and a clearly differentiated, low carbon generation mix. We are confident that these long-term transactions stand us in good stead while the forward curve indicates for the future, positioning the Group to be able to target investment that they will rise again during in areas of greatest return, while remaining at the centre of ensuring security of supply for the UK. 2010, it is clear that we are in a Downstream in the UK, British Gas delivered a strong performance, very different commodity price having combined our residential energy, services and business energy activities under a single management team. We also environment from that experienced recognise that 2009 has been a difficult year for many of our in 2008. This comes at a time when customers. British Gas was the first of the major suppliers to reduce prices in 2009 which, combined with reduced average consumption, the UK Government recognises provided a welcome reduction in bills. And our price reduction early in 2010 made us the cheapest major supplier of gas and power to that unprecedented levels of the residential market. investment will be required across By contrast, due to the lower commodity price environment, profits from our UK gas and oil business were down year-on-year, as we the industry if security of supply took the decision to stop production at Morecambe and preserve the is to be maintained and tough value of our gas reserves. Offsetting this, the losses from our legacy industrial and commercial contracts were much reduced, and our environmental targets met. power station fleet performed well, taking advantage of favourable clean spark spreads. Our North American business had a difficult year and was impacted by pervading low wholesale commodity prices and one-off factors, however it remains well placed for future growth as we look to build a more integrated business model. Dividend The Board of Directors is proposing a final dividend of 9.14 pence per share to be paid in June 2010, bringing our full-year dividend to 12.8 pence per share, an increase of 4.9%. This is in line with our policy of delivering sustained real growth in the ordinary dividend. Board changes Deryk King, President and Chief Executive Officer of Direct Energy retired in July, and was succeeded by Chris Weston who also joined the Board of Directors of Centrica plc on 1 July 2009. Chris was previously the Managing Director of British Gas Services. As part of combining the divisions of British Gas into a single organisation, Phil Bentley took on responsibility for the whole 2 Covering all bases: Review – Business Report Directors’

Significant additions to our upstream portfolio in 2009 enable us to supply even more energy to our customers from our own resources. Directors’ Report – Governance Report Directors’

downstream UK business in March 2009. Phil remains a Director The industry as a whole is entering a significant investment phase, of Centrica plc. as the UK moves towards a lower carbon future whilst maintaining security of supply. The Government has a vital role to play in With effect from 26 November 2009, Nick Luff and Mark Hanafin providing the stable investment climate, planning regime and represent Centrica on the boards of the British Energy joint ventures appropriate market support mechanisms, which will be essential in respect of our nuclear activities. to underpin the long-term investments that will be required. Paul Walsh, a Non-Executive Director stepped down from the Building on our extensive expertise, upstream and downstream, Centrica Board at the Annual General Meeting on 11 May 2009. Centrica is well positioned to grasp the opportunities this will present Paul joined the Board in March 2003. We are grateful for his in a low carbon world and invest in appropriate solutions for the contribution and are actively seeking a replacement. benefit of our customers and shareholders. Our employees Financial Statements Our employees remain central to the success of Centrica. We experienced one of our busiest ever periods for call-outs during the recent cold weather and I am immensely proud of the dedication and determination our people have demonstrated as they strive to deliver our ultimate product – warm, well lit and energy efficient homes and businesses for all our customers. The future

Roger Carr Shareholder Information 2009 has been a transformational year for Centrica, delivering Chairman a stronger business both upstream and downstream. Our new 25 February 2010 strategic priorities set the agenda for the coming years, underlining the wide range of growth opportunities that we are able to pursue.

Earnings and operating profit numbers are stated, throughout the Annual Report, before depreciation of fair value uplifts to property, plant and equipment from Strategic Investments and exceptional items and certain re-measurements where applicable – see note 2 for definitions. The Directors believe this measure assists with better understanding the underlying performance of the Group. The adjusted operating profit numbers are reconciled at Group level in the Chief Executive’s Review. Exceptional items and certain re-measurements are described in note 8. Adjusted earnings and adjusted basic earnings per share are reconciled to their statutory equivalents in note 14. All current financial results listed are for the year ended 31 December 2009. All references to ‘the prior period’, ‘the prior year’, ‘2008’ and ‘last year’ mean the year ended 31 December 2008 unless otherwise specified. Throughout this Report references to British Gas include Scottish Gas.

Our business principles Our Group-wide business principles create a framework to help us make decisions in line with a consistent set of operating behaviours based on trust, integrity and openness.

1. Demonstrating integrity in corporate conduct 5. Valuing our people 2. Ensuring openness and transparency 6. Focusing on health, safety and security 3. Respecting human rights 7. Protecting the environment 4. Enhancing customer experiences and business 8. Investing in communities partnerships Our ongoing campaign to communicate these principles will help our employees, business partners and external audiences understand the standards we expect.

Centrica plc Annual Report and Accounts 2009 3 Business Chief Executive’s Review Review A year of transformation Centrica’s underlying operating performance in 2009 demonstrated resilience in a year of sustained economic downturn and weak commodity prices. Sam Laidlaw, Chief Executive

The liberalised UK energy market has proved central to the delivery 2009 was a year of significant of secure energy supplies over the past 20 years, while ensuring the achievement for Centrica with UK benefits from the lowest domestic gas prices in Western Europe. The strength of this model was demonstrated when the market coped British Gas now transformed well with days of record demand through the winter of 2009-10. and the completion of the Venture However, there is no room for complacency. Since 2004, the UK has been a net importer of gas, and imports accounted for approximately and British Energy transactions. 50% of this past winter’s demand. That figure is likely to reach 75% by 2015 and securing sustainable sources of energy supply for our Our existing strategic priorities UK customers is one of our key priorities. have now been achieved, and in Many in the industry predict an energy gap in the middle of the decade when coal-fired and oil-fired power stations close because February 2010 we announced new of European pollution laws and as ageing nuclear power stations are priorities to build on the robust, phased out. We must bridge that gap by moving quickly to build new gas and nuclear power stations and gas storage facilities. vertically integrated business Ofgem, the energy regulator, has acknowledged the £200 billion model that we have in place. investment challenge the UK faces, if we are to maintain energy security and start to decarbonise our economy to meet global 2050 Centrica is well positioned to carbon targets. That will inevitably have an impact on the cost of energy for consumers, though higher bills can be eased by pursue growth opportunities continuing to invest in improving the energy efficiency of our homes and lead the drive to a low carbon and businesses. world, whilst maintaining the The energy industry is ready to play its part in delivering the investment needed, as long as the Government and regulator can financial discipline to secure establish the right market frameworks. Centrica, for example, has invested more than £4 billion in the last year alone in new sources strong returns on our investments. of energy for our customers and we expect to spend a further £15 billion by 2020 on new sources of gas, power generation and gas storage facilities that will help underpin the UK’s energy future. Energy industry overview Centrica’s performance Our strong performance over the last year has come against a very 2009 was a year of significant achievement for Centrica. The challenging backdrop of severe recession and continuing volatility in acquisition of Venture in August and the transaction with EDF to wholesale energy prices. acquire a 20% equity stake in British Energy in November means that we now have a more robust and integrated business model, which Eighteen months ago, high oil, gas and power prices provided a enables us to meet a greater proportion of our customers’ energy strong signal to producers to continue investment in energy needs from our own sources. These are long-term acquisitions, infrastructure. It was a time of high energy usage by retail consumers concluded in a low commodity price environment, creating an and gas-fired power generation due to global economic growth. upstream division that is now a growth business in its own right. The impact of the recession led to a fall in demand for gas and Downstream, we have continued to make improvements to the electricity in both Europe and North America, an excess supply of service and propositions we offer to our customers. We are focusing gas and a resultant weakening of spot prices, leading to a reduction on delivering a range of new propositions and energy efficient in upstream investment. solutions to help customers manage their energy bills. We will lead the transformation to a low carbon world through the installation of 4 To see more online, go to www.centrica.com/ceo2009

2009: The key events Review – Business Report Directors’

Quarter 1 Quarter 2 Quarter 3 Quarter 4 British Gas first to announce British Gas acquires 19% Centrica acquires Venture Centrica acquires 20% stake gas price cuts for over stake in Econergy, a leader in British Energy, adding Centrica signs agreement on 7.5 million homes in biomass heating nuclear to the portfolio Trinidadian exploration gas block Centrica acquires 70% stake British Gas cuts electricity Centrica’s 885MW gas-fired Centrica ranked top UK utility in a project to develop the prices by 10% power station at Langage and one of the top utilities UK’s second largest gas begins operations Direct Energy secures worldwide for carbon disclosure storage field Massachusetts State energy supply contract Directors’ Report – Governance Report Directors’

smart meters and new technological solutions and energy efficiency transaction to acquire our stake in British Energy. As announced advice. Our network of highly trained service engineers are well at the time of the interim results in July, we plan to exit the small positioned to deliver this growing range of services. positions we have in The Netherlands and Spain and we are making progress towards this. This will allow us to focus our attention on Centrica’s underlying operating performance in 2009 demonstrated markets where we already have strong positions and where we see resilience in a year of sustained economic downturn and weak good growth prospects. commodity prices, with the reduction in upstream earnings being offset by a greater downstream contribution. Strategic progress The reduction in wholesale gas prices from their peak in 2008 led The completion of the Venture and British Energy transactions, to a substantial reduction in operating profit for our upstream UK together with the improvements made across the organisation, mean

business, Centrica Energy, in 2009. Gas production volumes were that we have delivered against the strategic priorities we laid out three Financial Statements 29% lower year-on-year, as we decided to preserve the value of our years ago: gas reserves by reducing production from the Morecambe fields. 1. Transform British Gas This short-term earnings impact was partially offset by a strong 2. Sharpen the organisation and reduce costs financial performance from our combined cycle gas turbine (CCGT) 3. Reduce risk through increased integration fleet, which benefited from favorable clean spark spreads. Our new 4. Build on our growth platforms CCGT power station at Langage is now operational and including the investment in British Energy, Centrica’s UK power generation In our downstream UK business, British Gas has undergone capacity has increased from 4.2 gigawatts (GW) to 7.1GW. Centrica considerable change. We have dramatically improved our service Storage continued to perform well, with Rough achieving the highest levels and operational efficiency, and have significantly reduced level of utilisation since it was acquired in 2002. costs. As a result, our competitive position is much improved, Shareholder Information particularly in residential energy, and we have increased profitability Downstream in the UK, British Gas recorded a strong performance, in all parts of the business. We have combined our downstream underpinned by higher service levels and improved price activities into a single business, and with our unique services competitiveness which led to customer account growth. Our market capability, strong brand and leading position in energy efficiency leading price reductions in the first half of 2009 for residential energy we are well placed to deliver further growth. customers, combined with continued strong growth from the services product range, helped us to increase our total product Upstream, the acquisitions of Venture and a 20% equity stake in holdings by 550,000. We were also able to grow the number of British Energy fundamentally change the shape of the business, customers who take both an energy and a services product from us aligning us more closely with our downstream competitors in the by 164,000, deepening these customers’ relationship with us which UK. These acquisitions provide us with further options in our should result in higher retention rates. Within business energy our investment programme building on our leading positions in offshore retention rates remain high, as we focus on those customers who wind and gas storage. value the high level of service we provide. In North America we have a strong downstream position in key The North American business experienced difficult operating deregulated markets and we have materially grown the scale of our conditions. The downstream residential energy results were business energy division. We have added gas assets to support the impacted by one-off adjustments totalling £61 million in the year downstream and these, combined with our services presence, give and lower gas and power prices impacted our upstream business. us a strong base to invest for incremental growth and value with the However, the underlying performance of both our downstream aim of building an integrated energy business over the medium term. residential and business operations was strong, the latter benefiting As a result of these achievements we have an integrated, well from the Strategic Energy acquisition in 2008. We continue to see financed business that is positioned to pursue future growth significant growth potential for our North American business and will opportunities. We will consider a range of investment options across consider opportunities upstream and downstream to build on our our businesses, targeting an appropriate return on investments made. integrated energy model. Our vision remains unchanged – ‘To be the leading integrated energy In Europe, we completed the sale of our 51% stake in the Belgian company in our chosen markets’. We have however introduced new business SPE to EDF for £1.2 billion in November, as part of the Centrica plc Annual Report and Accounts 2009 5 Business Chief Executive’s Review Review continued Our new strategic priorities:

1. Grow British Gas 2. Deliver value from our growing upstream …leading the transition to low carbon homes and business businesses by: …securing sustainable energy for our customers by: • optimising the business to leverage scale for further efficiency • being a leading consolidator of mature and orphaned assets in and to deliver best-in-class service; the UK continental shelf; • taking the lead in new energy/service propositions, online • optimisation of the power generation fleet; and capability and servicing multi-premise sites; and • our unique pipeline of low carbon investment choices including • capturing new markets by leading on smart meters, driving wind, new nuclear, gas development and gas storage. microgeneration adoption and focusing on community segments.

strategic priorities, which will enable the business to move forward initiatives, these give us a strong platform for growth. We have also and deliver growth. put in place initiatives to deliver cost reductions in excess of our previously announced target of £100 million, allowing us to re-invest 1. Grow British Gas in the business as we build on the strength of the British Gas brand. …leading the transition to low carbon homes and businesses And our price reduction in February 2010 made us the cheapest 2. Deliver value from our growing upstream business major domestic supplier of both gas and electricity to UK customers. …securing sustainable energy for our customers 3. Build an integrated North American business The current low commodity price environment in 2010 represents …with leading positions in deregulated markets a challenge to our upstream UK business, however our flexible 4. Drive superior financial returns business model remains well placed to capitalise on market …through operating performance and our investment choices opportunities and 2010 will see the first full year of contribution from both Venture and British Energy. Venture has been combined with By capitalising on the distinctive capabilities we have built, these our existing upstream business to create an organisation that has the strategic priorities will help each of our businesses to realise their technical and operating capability to work across a wide range of full potential, as Centrica strives to become the leading integrated geologies and technologies in offshore oil and gas in and around UK, energy company in its chosen markets. Dutch and Norwegian waters. We are now well placed to become Our business model is highly cash generative, enabling us to support the leading consolidator and operator of mature and orphaned gas a capital investment programme of around £1.5 billion per annum from assets in the UK continental shelf. The operational performance of internally generated resources. Centrica is therefore well positioned to the British Energy nuclear fleet has been strong, benefiting from the pursue targeted growth opportunities, with options for potential investment made in the plant in recent years and we are already investment across each business. Strict financial discipline will be engaged with EDF on pre-development studies for the next maintained to secure strong returns on our investments. generation of nuclear power stations in the UK. Business outlook Having brought 15 LNG cargoes to the UK in 2009 we already have seven contracted for delivery during 2010–11. LNG is likely to provide 2010 has seen a cold start to the year, leading to record demand for an increasing amount of gas to the UK over the next decade as local gas in the UK. The country’s infrastructure has coped well following production declines, helping to ensure security of supply for the UK. recent investment by the industry, with demand being met by a In this respect our announcement of an agreement to acquire a combination of local production, pipeline gas, liquefied natural gas share of both existing LNG production and substantial undeveloped (LNG) and gas from storage. Our Rough storage facility performed gas reserves in Trinidad and Tobago is significant. In gas storage, extremely well, supplying around 10% of UK gas demand on each of work continues on our three potential projects, totalling 85 billion the three days in January when National Grid ‘Gas Balancing Alerts’ cubic feet (bcf) which would increase existing UK capacity by around were issued. However, in order to secure the country’s future 50%. Final investment decisions are planned for the Caythorpe and requirements, we believe that significant further investment and more Baird projects in 2010 and for Bains early in 2011. Subject to long-term gas contracts are required as local production declines investment approval, Caythorpe is expected to be operational in the and an increasing proportion of gas demand is met through imports. storage year 2012–13 with both Baird and Bains operational in the We expect to see continued benefits from bringing our UK residential, storage year 2013–14. services and business divisions together. We will seek to increase During 2009 we successfully implemented innovative and efficient further the number of households that hold both an energy and financing structures for a number of our wind farm developments. related services product, through the selling of bundled propositions, In October we agreed the sale of a 50% equity stake in the Lynn, whilst also expanding our product range as the energy industry moves Inner Dowsing and Glens of Foudland wind farms, together with towards a low carbon future. We announced our intention to build a the provision of non-recourse financing facilities for these assets. major smart metering business in July 2009 and in February 2010 we In December we announced a transaction to sell 50% of the announced the creation of 1,100 new ‘green collar’ roles, through the 270 megawatt (MW) Lincs offshore wind farm to Siemens Project building of an insulation business. Combined with the new energy Ventures and Dong Energy and secured enhanced turbines for this technologies we have built up over the past two years and a growing development project. Going forward it will continue to be important capability of working with local authorities on joint energy saving to ensure that we put in place efficient financing structures for all our 6 To see more online, go to www.centrica.com/ceo2009

Our new strategic priorities: Review – Business Report Directors’

3. Build an integrated North American business 4. Drive superior financial returns …with leading positions in deregulated markets by: …through operating performance and our • improving returns from existing business; investment choices by: • developing leading positions in deregulated markets by • achieving returns significantly above our cost of capital; capturing large profit pools and leveraging services capability; • maintaining a strong balance sheet and leveraging flexibility • investing for incremental growth and value; and in our investment portfolio, supported by; • further developing the integrated energy model to reduce • a health and safety focused culture, best-in-class service commodity price exposure and deliver value through lower levels, focus on costs, leading technology and strong cost procurement and asset optimisation. organisational capability. Directors’ Report – Governance Report Directors’

investments. We have submitted planning consent applications for prices, production volumes and downstream consumption levels, we our further projects at Docking Shoal and Race Bank in the Greater have confidence in the robustness of our business model and in the Wash area which combined would add a total of 1.1GW to our wind forward momentum we have created. portfolio. In January 2010 we also secured a Round 3 wind farm In difficult trading conditions, set against a backdrop of the most development zone, in the Irish Sea, with a potential capacity of 4.2GW. serious recession for decades, the commitment and skills of our On the current forward curve coal remains at the margin, with clean employees have helped establish a strong foundation on which to spark spreads remaining above clean dark spreads for much of the build and grow our business. The Executive team and I have asked year, although spreads have narrowed from the levels seen in 2009. a great deal from our employees in 2009 and they have responded magnificently – my thanks to them for the part they have played in The macroeconomic environment in North America is improving, delivering such a strong performance.

with the US economy now out of recession and unemployment Financial Statements beginning to fall, although the wholesale forward prices of gas and In conclusion, I am delighted with the transformational progress that power remain substantially below levels seen at their peak in 2008. we have made during 2009, having successfully delivered against In our North American business, Direct Energy, a new management our strategic priorities laid out three years ago. Our new priorities team has been appointed and we will focus on improving our returns take the Group forward, building on the robust, vertically integrated from the existing business and assessing further opportunities. business model that we now have in place. Centrica is well positioned to deliver growth and lead in a low carbon world with new Direct Energy is well positioned in key deregulated markets and we propositions and services for our customers – backed up by new see the potential to build the scale and efficiency of the business. We sources of energy. We will deliver value to shareholders by maintaining will invest for growth and value and further develop the integrated strict financial discipline to secure strong returns on our investments. energy model over time. Our objective is for Direct Energy to achieve Shareholder Information a leading position in deregulated markets, to deliver an increasingly material contribution to Group earnings over the medium term and diversify our geographic earnings profile. Overall the outlook for 2010 is positive and we are trading in line with expectations, with strong downstream performance offsetting the Sam Laidlaw impact of low gas prices on our upstream businesses. Whilst the final Chief Executive outturn will depend on a number of factors, including commodity 25 February 2010

Throughout the Operating Review and Group Financial Review, reference is made to a number of different profit measures, which are shown in the table below:

2009 2008 Term £m £m Explanation Adjusted operating profit*: Downstream UK 1,011 712 The supply of gas, electricity and services for UK residential and business customers Upstream UK 525 881 The production, generation, optimisation and trading of energy in the UK Storage UK 168 195 Gas storage in the UK North America 153 215 Downstream and upstream activities in North America Total adjusted operating profit* 1,857 2,003 The principal operating profit measure used by management and used throughout the Operating Review Impact of fair value uplifts (27) – Depreciation of fair value uplifts to property, plant and equipment of Strategic Investments Interest and taxation on joint ventures and associates and other costs (16) (11) Group operating profit† 1,814 1,992 Operating profit from continuing operations before exceptional items and certain re-measurements Group profit† 1,104 964 Profit from continuing operations before exceptional items and certain re-measurements Statutory profit/(loss) 856 (136) Profit/(loss) including discontinued operations, exceptional items and certain re-measurements

Financial KPIs

Adjusted basic earnings per share^ (EPS) Adjusted basic earnings per share^Ω (pence) EPS is an industry standard determining corporate profitability 09 21.7 for shareholders. In 2009 EPS remained unchanged at 21.7 08 21.7 pence despite a 22% increase in the average number of shares 07 27.2 in issue. 2007 was an exceptional year as a result of favourable commodity prices experienced in the first half of 2007 which This measure of performance is calculated as profit before other costs and depreciation of fair value uplifts to property, plant and equipment from Strategic drove profitability in the residential supply business. Investments and exceptional items and certain re-measurements for the year, attributable to equity shareholders of the parent company, divided by the weighted Target/commitment – To deliver growth in adjusted EPS average number of shares in issue during the year. over a three-year period. This measure is used as one of the Source: The measure of adjusted basic EPS is reported in note 14 of the audited performance conditions in the Long Term Incentive Scheme, Financial Statements. outlined on pages 50 and 51.

Total shareholder return (TSR) Total shareholder return indices – Centrica and FTSE 100 Index for the five years ended 31 December 2009 The Board continues to believe that to realise the Company’s long-term strategic goals, TSR is a valuable key performance 180 indicator to assess the Company’s performance in the delivery 160 of shareholder value. 140 Centrica has outperformed the FTSE 100 Index by 20% over 120 a five-year period. 100 Target/commitment – TSR is utilised as a measure of 04 05 06 07 08 09 Centrica return index FTSE 100 return index performance over a three-year period in the Long Term Incentive Scheme, outlined on pages 50 and 51. Total shareholder return measures the return to shareholders in terms of the growth of a £100 investment in the Company’s shares, assuming that dividends and returns of capital are reinvested. We compare our TSR with those of the other 99 members of the FTSE 100 at the start of each performance period. Source: Alithos Limited

Dividends per share Ordinary dividendΩ (pence) Dividends per share indicate the level of earnings distributed 09 12.8 to Centrica shareholders. 08 12.2 07 The 2009 dividend shows an increase of 4.9% on the 2008 11.6

dividend. This is the total dividend per share (excluding special dividends) paid in respect of each financial year. Target/commitment – To deliver real growth per annum. Source: The dividend is reported on the Group Income Statement, part of the audited Financial Statements.

^ including joint ventures and associates stated gross of interest and taxation, and before other costs and depreciation of fair value uplifts to property, plant and equipment from Strategic Investments and exceptional items and certain re-measurements

Ω earnings per share and dividends per share figures for 2007 have been restated to reflect the bonus element of the Rights Issue in 2008 8 For more details on our KPIs, go to www.centrica.com/kpis2009

Non-financial KPIs Review – Business Report Directors’

Customer satisfaction segments. The review is providing valuable insight into how Direct Energy’s processes and activities influence NPS and the Customer satisfaction is key to retaining and growing the key actions we can take to support continuous improvement. customer base and is therefore central to our business strategy. Target – The change in British Gas methodology means that The net promoter scores (NPS) for British Gas, in both the our 2010 target is +3. Direct Energy aims to improve on 2009 residential and services business, increased significantly, as did scores under the current methodology and roll out an improved those for Direct Energy. The increases are a result of significant NPS system in 2010. improvements to our processes, systems and employee training which reflect the shift towards a more customer-focused Net promoter score 2009

organisation. British Gas 09 The scores reported for 2009 have been calculated with the 7.0% 08 -0.8% same methodology used in previous years. However in 2010, 07 3.1% we will be reporting using improved methodology for British Gas, following a comprehensive review of NPS at the end of 2009. Direct Energy – Governance Report Directors’ 09 9.5% The new Brand NPS measure gives us a representative view 08 6.9% across the business, as well as competitor comparisons and 07 5.1% clearer insights into the drivers of NPS. At the end of the year, The NPS measures customers’ responses to the question ‘How likely would you be the new British Gas Brand NPS was –2 and we were equal first to recommend us as an energy supplier to a friend or relative (0-10)?’ The score is in the supplier league table with three other suppliers. calculated by the percentage of customers defined as promoters (scoring 9-10) minus the percentage defined as detractors (0-6). Direct Energy is also conducting a review of customer Source: Internal calculations combining figures for residential, business and services satisfaction measures across all customer-facing business divisions. Net promoter scores are collected through customer feedback forms and telephone interviews conducted by a third-party supplier.

Carbon intensity nuclear and renewables. There are also considerable uncertainties over closure dates for existing generation facilities.

Decarbonising power generation is a critical enabler for other Financial Statements However, we are currently aiming to reduce our UK power sectors of the economy to meet the UK’s CO2 targets and generation carbon intensity to 260g CO2/kWh by 2020. our strategy is to invest in lower carbon generation, such as high-efficiency gas-fired power stations and offshore wind farms. Carbon intensity g CO2/kWh Centrica is one of the leading offshore wind farm operators. 09 370g* † We continued to reduce the carbon intensity of our power 08 379g 07 390g generation fleet in 2009, achieving 370g CO2/kWh. During the year, we purchased a 20% stake in British Energy and concluded New 2012 target 270g Prev 2012 target an agreement to acquire 20% of the electricity produced. This 380g 100160 220280 340400 offtake will start in April 2010 and will significantly reduce our Shareholder Information carbon intensity. As a result, we have reassessed our targets * 2009 data subject to final verification † verified 2008 figure restated to ensure that they remain challenging. Carbon intensity measures the amount of carbon dioxide (CO2) emitted per unit of – To reduce our UK power generation carbon intensity electricity generated. Our figures are based on average annual emissions from all Target wholly-owned UK power generation assets and all other power generation assets to 270g CO2/kWh by 2012. from which Centrica is entitled to output under site-specific contracts in the UK. Source: Based on verified emissions data under the requirements of the EU Identifying an appropriate target for 2020 is currently very Emissions Trading Scheme. difficult as it is contingent on Government support for new

Employee engagement Target – The next full global survey will be conducted in June 2010. Each part of the business will aim to improve their Engaged employees are essential to deliver our business individual scores to achieve a Group score of more than 66%, objectives, particularly against the backdrop of global economic ensuring we remain in the high performance category. downturn. Measuring engagement and the factors that drive it are a key focus of our people strategy, as this enables us to Engagement score % benchmark results more robustly. 09 66% 08 In 2009 we had an exceptionally high response rate of 90%. 57% 07 53% The scores for engagement Group-wide increased by nine 2010 target percentage points to 66% from 2008. Independent external >66% 020406080 benchmarks indicate that organisations with engagement scores The Centrica employee survey measures how people, from every team at all levels above 60% consistently deliver better business results. Our across the Group, feel about working for us. Questions include: Would you tell others current overall score of 66% places Centrica in the high this is a great place to work? Do you ever think about leaving? Does the Company performance range. inspire you to do your best every day? Source: The survey is managed by an external supplier, enabling us to benchmark our performance against other companies.

Centrica plc Annual Report and Accounts 2009 9 Operating British Gas Review

Restructuring the business model to lead in the low carbon world

2009 was a strong year for our Downstream UK As announced in February 2009, British Gas has been restructured downstream UK business, British and is now run as a single business, focused on meeting the energy Gas. Operational efficiency and and related service requirements of our customers. A combined management team is in place and support functions have been customer service improved across integrated. British Gas New Energy is now also part of the overall structure. We are building the capability of our operational staff to the business, and a continued work across our broad range of products, thereby further improving focus on safety issues resulted the efficiency of our operations and the overall customer experience. These changes, which will continue across 2010, position the business in a 53% reduction in lost time well for further growth through improved customer retention, cross- selling, development of new energy related products and cost incidents. This progress led to efficiencies. higher employee engagement and The number of ‘joint product’ households taking both an energy and customer satisfaction levels which, a service product grew by 164,000 in 2009 to over two million. This is an important indicator for British Gas and the deeper customer combined with our residential relationship should result in a greater level of retention. This growth reflects increased levels of cross-selling, with the proportion of sales energy price reductions, helped of energy products through services channels and sales of services deliver customer growth in every products through energy channels both increasing. In September we launched our first bundled energy and services proposition, part of the business. ‘EnergyExtra’, and 58,000 customers had chosen to take this product by the end of 2009. Overall the number of customer accounts in our residential energy business grew by 141,000 and we closed the year with 15.7 million

Downstream UK†

For the year ended 31 December FY 2009 FY 2008 Δ% H2 2009 H2 2008 Δ% Total customer accounts (’000) 25,211 24,661 2.2 25,211 24,661 2.2 Total customer households (’000) 12,226 12,034 1.6 12,226 12,034 1.6 Joint product households (’000) 2,043 1,879 9 2,043 1,879 9 Revenue (£m) 12,565 12,189 3.1 5,688 6,258 (9) Operating cost (excluding bad debt) (£m) 1,313 1,290 1.8 652 616 6 Operating profit (£m)* 1,011 712 42 539 408 32

10 accounts on supply. Within this we also actively increased the remains high in our small and medium enterprise (SME) business number of dual fuel customers. This growth followed our price and we have been successful in increasing the gross margins for Review – Business Report Directors’ reductions of 10% for the standard gas tariff in February and 10% for both SME and industrial and commercial customers as we offer a the standard electricity tariff in May, making us the cheapest supplier more comprehensive service for complex accounts where service is of electricity in all regions of Britain. And our recently announced a key differentiator. We also launched ‘Energy360’, the first combined price reduction, in February 2010, placed us as the cheapest major energy and services proposition for our business customers. domestic energy supplier for both gas and electricity in the UK. Our already strong operational performance continued to improve There was also significant growth in the number of services across British Gas. Calls received were down 12% on 2008. This was customer relationships, as we closed the year on 8.5 million due in part to more accurate energy billing, with 90% of customers relationships, an increase of 400,000. The continued success of our having been billed on the basis of an actual meter read during the secondary products, Plumbing and Drains Care, Home Electrical year. We expect this to increase further as more customers opt for Care and Kitchen Appliance Care contributed to much of this ‘EnergySmart’, a new proposition launched in November, which growth, and we were able to cross-sell these products to our allows customers to track their energy usage having submitted energy customer base as well as to existing Central Heating Care monthly meter reads online or by text message. Early indications are customers. Despite the economic downturn, retention remained high that this has increased the number of meter reads submitted online

for the core Central Heating Care product, as the increased breadth by around 50% to 75,000 per week. Our online platform is also – Governance Report Directors’ of our product range allowed us to offer customers effective experiencing greater usage for other transactions as well. An average alternative offerings. of 35,000 payment transactions per week are now being processed while around 450,000 ASVs were booked online during 2009, more Improved productivity enabled a doubling of the amount of upgrade than double the 2008 level. and on demand work undertaken and the completion of an additional 500,000 annual service visits (ASVs) in 2009. The number The amount of time taken to answer customer telephone calls of central heating systems installed was down by only 5% on the continued to fall as did the percentage of customers abandoning prior year despite challenging economic conditions, due to an calls before contact with a call centre. This improved customer improved selection of pricing options in our product range. service resulted in a reduction in the number of times our customers contacted the energy Ombudsman, with our share of complaints, The number of business energy customer supply points ended the at 19%, remaining well below the industry average. We launched year slightly up at 1.047 million, as we focused on value and our call-ahead service, where our engineers phone the customer retention following the step up in customer numbers at the end of to inform them when they are due to arrive and also increased the 2008 following the E4B and BizzEnergy deals. Customer retention Financial Statements

Residential energy supply†

For the year ended 31 December FY 2009 FY 2008 Δ% H2 2009 H2 2008 Δ% Customer accounts (period end) Gas (’000) 9,378 9,508 (1.4) 9,378 9,508 (1.4) Electricity (’000) 6,333 6,062 4.5 6,333 6,062 4.5

Total (’000) 15,711 15,570 0.9 15,711 15,570 0.9 Shareholder Information Estimated market share (%) Gas 43.4 43.5 (0.1) ppts 43.4 43.5 (0.1) ppts Electricity 24.2 22.2 2.0 ppts 24.2 22.2 2.0 ppts Average consumption Gas (therms) 506 547 (7) 211 234 (10) Electricity (kWh) 3,892 3,957 (1.6) 1,932 1,964 (1.6) Total consumption Gas (mmth) 4,771 5,345 (11) 1,983 2,226 (11) Electricity (GWh) 24,021 23,880 0.6 12,106 11,839 2.3 Revenue (£m) Gas 5,218 5,221 (0.1) 2,171 2,616 (17) Electricity 2,625 2,558 2.6 1,288 1,340 (3.9) Total 7,843 7,779 0.8 3,459 3,956 (13) Transmission and metering costs (£m) Gas 1,239 1,232 0.6 612 585 4.6 Electricity 617 595 3.7 313 300 4.3 Total 1,856 1,827 1.6 925 885 4.5 Operating profit (£m)* 595 376 58 300 212 42 Operating margin (%) 7.6 4.8 2.8 ppts 8.7 5.4 3.3 ppts

* including joint ventures and associates stated gross of interest and taxation, and before other costs and depreciation of fair value uplifts to property, plant and equipment from Strategic Investments and exceptional items and certain re-measurements † includes British Gas New Energy Centrica plc Annual Report and Accounts 2009 11 Operating British Gas Review continued proportion of boilers we fix on the first call out. These initiatives have central communications model. We already have an industry leading resulted in improved customer satisfaction in each part of the position in the installation of smart meters for businesses, with more business. The net promoter score (NPS) in services increased to a than 50,000 installed, and in July we announced that we are bringing new high of 54%, whilst the residential energy and business energy in house the installation, repair and maintenance of meters, currently divisions also saw substantial improvements in NPS. carried out by third parties. In addition we announced in February 2010 that we are building an insulation business, with the creation Overall higher customer satisfaction levels can also be attributed in of 1,100 new ‘green collar’ roles. part to improvements in employee engagement during 2009. Staff attrition reduced by 52% and absence by 20% compared to 2008, The range of new energy technologies British Gas has built up over whilst our Cardiff contact centre was recognised as ‘Call Centre of the last two years, combined with our services engineer base, give the Year’ in the 2009 European Call Centre Awards. These come on us a strong base for growth as the market for new energy products top of the recognition of British Gas in the Sunday Times ‘Top 20 and services expands. British Gas now has investments in biomass Best Big Companies to Work For’ and the Financial Times ‘UK’s 50 heating, through the acquisition of a 19% stake in Econergy Limited Best Workplaces’ in the first half of the year. early in 2009, solar, through our Solar Technologies business and fuel cell boilers, through our 10% minority equity stake and development We continue to lead the industry in helping our most vulnerable and distribution agreement with Ceres Power Holdings plc. In customers. We have nearly 500,000 customer accounts on our February 2010 we announced the go ahead of five biomethane residential social discounted tariff and spent more than double demonstration projects that should be the first technology of this our share of the overall Government target. Effective marketing type to inject gas into the grid. Business energy related services is campaigns such as our sponsorship of British Swimming have also a key area for future growth in British Gas, and during the year improved customer perception of the British Gas brand. We are we acquired Energy and Building Management Solutions Limited and also helping to raise awareness of energy efficiency through the Newnova Group Limited. British Gas has now made four acquisitions successful ‘Green Streets’ campaign and we have around 10,000 in the energy services and management sector in the past 12 schools participating in our ‘Generation Green’ programme, many months, giving us a strong base to build on as this market expands of which now have a smart meter. over the coming years. During 2009 we made strong progress in new areas that will help Revenue in the period was up 3% to £12,565 million (2008: £12,189 underpin the future growth of British Gas. In August we received million). Revenue in residential energy supply was broadly flat, as Financial Services Authority (FSA) approval to offer insurance-based average consumption reductions in domestic gas were offset by a home services products to customers. This is providing us with slightly higher average retail tariff year-on-year, as the average dual opportunities to grow our market leading position in the UK home fuel customer paid only £23 more. For residential services revenue services market, through increased flexibility around a wider range was 4% higher due to the continued growth in secondary products. of energy related services products. We also welcomed the UK Business energy supply and services revenue grew 8% due to an Government’s announcement in July 2009 regarding its plans for a increase in the average number of supply points and a higher full national roll-out of smart metering by 2020 and the supplier-led average contract price as contracts sold in the higher commodity

Business energy supply and services

For the year ended 31 December FY 2009 FY 2008 Δ% H2 2009 H2 2008 Δ% Customer supply points (period end) Gas (’000) 400 415 (3.6) 400 415 (3.6) Electricity (’000) 647 624 3.7 647 624 3.7 Total (’000) 1,047 1,039 0.8 1,047 1,039 0.8 Average consumption Gas (therms) 3,134 3,833 (18) 1,295 1,604 (19) Electricity (kWh) 32,275 33,771 (4.4) 15,947 16,976 (6) Total consumption Gas (mmth) 1,275 1,585 (20) 519 667 (22) Electricity (GWh) 20,512 19,051 8 10,245 9,882 3.7 Revenue (£m) Gas 1,170 1,268 (8) 454 600 (24) Electricity 2,146 1,795 20 1,057 1,019 3.7 Total 3,316 3,063 8 1,511 1,619 (7) Transmission and metering costs (£m) Gas 204 210 (2.9) 97 106 (8) Electricity 418 345 21 208 184 13 Total 622 555 12 305 290 5 Operating profit (£m)* 183 143 28 118 88 34 Operating margin (%) 5.5 4.7 0.8 ppts 7.8 5.4 2.4 ppts

Residential services

For the year ended 31 December FY 2009 FY 2008¥ Δ% H2 2009 H2 2008 Δ% Financial Statements Customer product holdings (period end) Central heating service contracts (’000) 4,598 4,571 0.6 4,598 4,571 0.6 Kitchen Appliances Care (no. of customers) (’000) 433 413 4.8 433 413 4.8 Plumbing and Drains Care (’000) 1,724 1,630 6 1,724 1,630 6 Home Electrical Care (’000) 1,430 1,305 10 1,430 1,305 10 Other contracts (’000) 268 133 102 268 133 102 Total holdings (’000) 8,453 8,052 5 8,453 8,052 5 Central heating installations (’000) 114 120 (5) 59 62 (4.8) Shareholder Information Revenue (£m) Central heating service contracts 725 694 4.5 366 352 4 Central heating installations 351 374 (6) 182 189 (3.7) Other 330 279 18 170 142 20 Total 1,406 1,347 4.4 718 683 5 Engineering staff employed 9,295 9,500 (2.2) 9,295 9,500 (2.2) Operating profit (£m)* 233 193 21 121 108 12 Operating margin (%) 16.6 14.3 2.3 ppts 16.9 15.8 1.1 ppts

Installations numbers include domestic and local authority installations. Revenue associated with non-contract central heating service work is included in other. 2008 revenue restated to reflect the change in revenue recognition policy. * including joint ventures and associates stated gross of interest and taxation, and before other costs and depreciation of fair value uplifts to property, plant and equipment from Strategic Investments and exceptional items and certain re-measurements ¥ restated to reflect change in British Gas Services Limited revenue recognition policy, as explained in note 2

Centrica plc Annual Report and Accounts 2009 13 Operating Centrica Energy Review

2009 was a transformational year for our upstream UK business

The acquisitions of Venture and Upstream UK In 2009 UK wholesale month-ahead gas and power prices fell by a 20% equity stake in British around 45%, resulting in a very challenging environment for Centrica Energy, combined with the Energy. Despite this reduction in commodity prices a strong operational performance and the optimisation of our portfolio, significant progress made in including the benefits of forward hedging, enabled us to deliver a good result. Overall the operating profit* for the division was £525 developing our existing asset million (2008: £881 million). portfolio, have considerably Upstream gas and oil strengthened Centrica’s integrated In 2009 our gas and oil production business underwent considerable change and grew materially following the acquisition of Venture for a business model. Having total cash consideration of £1.3 billion. This acquisition is fundamental to our ongoing strategy to become the leading consolidator and undertaken these material changes operator of mature and orphaned gas assets in the UK continental we are now well placed to deliver shelf. The integration of Venture with our existing business now provides us with a sustainable and flexible portfolio of assets with sustainable and attractive returns valuable development opportunities. over the long term. Our upstream gas and oil headquarters are now located in Aberdeen and the business is structured around five core regions in order to maximise our focus on asset and infrastructure performance, regional geology and business development opportunities. We are pleased to have retained the majority of the highly skilled Venture team who will help deliver the new strategic direction of the business. Following the acquisition a full audit of Venture’s gas and oil reserves has been completed and found to be in line with our expectations. Having used a prudent reserves recognition methodology, which conforms with internationally accepted Petroleum Resources Management System (PRMS) guidelines, both Centrica’s existing reserves base and Venture’s have been redefined. In total our gas and oil reserves base is now 400 million barrels of oil equivalent (mmboe). The significant fall in UK gas prices experienced during 2009 resulted in our gas and oil business reporting a lower overall contribution, with an operating profit* of £444 million (2008: £1,164 million). Gas production volumes, including four months of production from Venture, were down 29% to 1,708 million therms (mmth) (2008: 2,418mmth). We took value maximising decisions to shut in production at South Morecambe during periods of low gas prices, resulting in a 51% reduction in Morecambe volumes. Contractual positions were instead met through short-term market purchases. Oil and condensate production volumes increased to 8.8mmboe (2008: 6.5mmboe) reflecting additional volumes produced from the Venture

14 portfolio. The average achieved gas sales price was 48.9 pence per We have further strengthened our position as one of the leaders therm (p/therm) (2008: 59.1p/therm). This was approximately 40% in offshore wind. In October we announced that the 270MW Lincs Review – Business Report Directors’ higher than the average month ahead price in 2009 and was offshore wind development project had received final investment achieved by selling forward a proportion of gas production volumes approval with construction expected to commence in 2010. The when the gas price was materially higher. While our hedging anticipated costs of construction, excluding offshore transmission programme is ongoing, the majority of hedges made in 2008 have assets, are expected to be around £750 million and first power now unwound. should be generated towards the end of 2012. In line with the UK Government Renewables Obligation Certificate (ROC) regime, the Total production costs increased to £796 million (2008: £620 million). project will attract two ROCs per megawatt hour (MWh) generated, The increase reflected a higher proportion of production relating to a critical component supporting the economics of the project. In our newly developed and acquired fields, which have a higher unit December we subsequently announced the sale of a 50% equity cost than our existing fields. This more than offset the effect of lower stake in the Lincs project to Siemens Project Ventures and Dong production at Morecambe. Energy, a deal which completed in February 2010. This agreement We continued to make strong progress on our gas development enables the project to benefit from Siemens’ latest turbines, which projects. In The Netherlands region, first gas on the final Grove are expected to achieve higher load factors, therefore improving the development well was achieved in September following installation of project economics further. connecting infrastructure. At our Chiswick field a third development – Governance Report Directors’ The decision to proceed with Lincs was announced at the same time well was successfully drilled with production expected to commence as the equity sell down and agreed project financing for the Lynn, in early 2010. Work on the F3-FA development has begun and is Inner Dowsing and Glens of Foudland wind farms. Under this expected to be completed during summer 2010, with first gas agreement we sold a 50% equity stake in these wind farms to Trust expected during winter 2010–11. In the Southern North Sea, well Company of the West (TCW) for a cash consideration of £84 million and subsea connecting infrastructure is now complete at Seven and entered into agreements to raise approximately £340 million of Seas, however we are awaiting pipeline tie-in to the West Sole non-recourse project finance facilities from a consortium of banks. Alpha platform. Significant progress was made on the joint subsea This agreement has established an effective structure for recycling developments on both Eris and Ceres with both projects expected to capital and mobilising third-party funds efficiently. Centrica also yield first gas during the first half of 2010. Work has also commenced entered into 15-year Power Purchase Agreements (PPA) to off-take on the Cygnus development where we will be drilling two appraisal all of the electricity production and 50% of the ROCs generated by wells in the Western part of the field during the first half of 2010. the three refinanced wind farms. As part of our focused exploration and appraisal programme we In January 2010 we welcomed the news that Centrica had been Financial Statements successfully drilled the Rhyl exploration prospect in the East Irish successful in The Crown Estate’s Round 3 offshore wind tendering Sea, near the Morecambe fields. Results from the well tests process, having been awarded exclusive rights to develop up to are encouraging, with indications that this could be an attractive 4.2GW in the Irish Sea zone. This announcement further increases development opportunity with potentially 8mmboe of gas resources our portfolio of wind development opportunities and provides recoverable. We also approved drilling of the Alcyone exploration valuable geographic diversity in a region where we have operating prospect. However appraisal drilling results on the Acorn prospect experience. Development projects are unlikely to begin until at least were disappointing and exploration drilling on the Deep Banff, 2016, subject to final investment decisions. Morpheus and Mon prospects in the North Sea were unsuccessful. Our new 885MW Langage CCGT station, with a thermal efficiency In January 2009 we announced the acquisition of a 67% interest in of 53%, is now operational following successful plant performance Shareholder Information the undeveloped York gas field in the Southern North Sea, adding to tests and is now in final handover testing. During the year we the 23% acquired in 2002 as part of Centrica’s Rough gas storage also continued to make efficiency improvements to our existing acquisition. In July we signed a production sharing agreement with CCGT fleet. the Trinidadian Government on Block 2(ab). Following farm-downs of equity we will hold a non-operated equity stake of 29.25% in Overall the power generation segment delivered a strong financial the block. In February 2010 we announced a further transaction and operational result with an operating profit* of £147 million in 2009 in Trinidad and Tobago, whereby we have agreed to purchase a (2008: £11 million) reflecting a strong contribution from our CCGT portfolio of producing and undeveloped gas assets. This transaction fleet, a full-year’s contribution from the Lynn and Inner Dowsing wind will establish our first producing LNG position and will provide farms and one month’s output from the British Energy fleet. us with significant development opportunities for future, long-term Our CCGT fleet benefited from the fall in gas prices particularly during LNG supplies. the second half of 2009, which resulted in our gas-fired power Power generation stations displacing coal generators on the merit order. Strong CCGT Our power generation business performed strongly in 2009. In fleet reliability of 97% (2008: 94%) combined with a sound hedging November we successfully completed an improved deal with EDF to strategy provided us with greater exposure to higher second half acquire a 20% equity interest in British Energy, the operator of eight clean spark spreads. Overall the average load factor across the existing nuclear power stations in the UK, for £2.3 billion. This was CCGT fleet increased to 69% (2008: 67%). Total volumes, including funded in part by the sale of Centrica’s 51% equity stake in the the wind fleet and one month’s share of output from British Energy, Belgian business SPE to EDF for £1.2 billion. This joint venture with increased to 25.2TWh (2008: 23.4TWh). EDF provides us with access to 20% of the uncontracted power from The progress made in 2009 supports the strategic direction of our the existing nuclear fleet, an additional 18 terawatt hours (TWh) of power generation business as we aim to increase the level of asset power from EDF over five years from 2011 and the right to participate cover to our downstream businesses, diversify the generation mix in EDF’s UK New Nuclear Build (NNB) programme. with a focus towards lower carbon intensity and build on our leading position in renewable generation.

Industrial and commercial £199 million being recognised, of which £160 million was included This segment reported an operating loss* of £93 million in 2009 in provisions at the end of 2009. (2008: £331 million operating loss*). The average sales price achieved Our LNG activity progressed considerably in 2009, as the UK has increased by 10% to 45.8p/therm (2008: 41.6p/therm) as a result of become an increasingly attractive destination for LNG cargoes in legacy index-linked pricing mechanisms within the contracts which the global economic downturn. During the year we took delivery priced in at a higher rate. The reduction in wholesale gas prices of 15 cargoes into the Isle of Grain terminal totalling 575 mmth from resulted in customers reducing their demand under these contracts a variety of destinations including Qatar, Trinidad, Norway and to 1,268mmth (2008: 2,493mmth). This reduction in demand, Australia. We have also contracted a further seven cargoes for combined with a hedged position going into the year, meant that the delivery in 2010–11. reported results did not benefit fully from the fall in wholesale prices. Proprietary energy trading Also included in this segment is a legacy gas procurement contract, Accord delivered an operating profit* of £27 million (2008: £37 million). which has become significantly loss making due to the reduction Following a strong first half, the volatile markets resulted in trading in commodity prices. Notice to terminate has been given which will losses* being incurred in the second half. take effect from October 2011 resulting in an exceptional charge of

Upstream UK

For the year ended 31 December FY 2009 FY 2008 Δ% H2 2009 H2 2008 Δ% Upstream gas and oil Gas production volumes (mmth) Morecambe 847 1,716 (51) 294 696 (58) Other 861 702 23 475 309 54 Total 1,708 2,418 (29) 769 1,005 (23) Average gas sales price (p/therm) 48.9 59.1 (17) 40.5 67.8 (40) Oil and condensate production volumes (mmboe) 8.8 6.5 35 5.6 3.2 75 Average oil and condensate sales price (£/boe) 38.1 45.0 (15) 43.0 46.6 (8) Production costs (£m) 796 620 28 487 333 46 Operating profit (£m)* 444 1,164 (62) 98 526 (81) Power generation Power generated (GWh) Gas-fired 23,203 22,817 1.7 13,552 11,464 18 Renewables 821 549 50 435 366 19 British Energy 1,128 0 nm 1,128 0 nm Total 25,152 23,366 8 15,115 11,830 28 Achieved clean spark spread (£/MWh) 11.7 7.3 60 11.7 7.7 52 Achieved power price (including ROCs) (£/MWh) – renewables 97.3 124.2 (22) 104.9 145.4 (28) Achieved power price (£/MWh) – British Energy 45.9 n/a nm 45.9 n/a nm Operating profit (£m)* 147 11 1,236 104 15 593 Industrial and commercial UK I&C external sales volumes (mmth) 1,268 2,493 (49) 651 1,150 (43) UK I&C average sales price (p/therm) 45.8 41.6 10 42.6 43.7 (2.5) Operating (loss) (£m)* (93) (331) nm (4) (173) nm Proprietary energy trading Operating profit (£m)* 27 37 (27) (7) 10 nm Upstream UK operating profit (£m)* 525 881 (40) 191 378 (49)

16 Centrica Storage

Gas storage plays Review – Business Report Directors’ an increasingly important role in maintaining supply Directors’ Report – Governance Report Directors’

an achieved SBU price of 46.8p for the 2009–10 storage year. The Rough storage facility once Operating profit* was down 14% to £168 million (2008: £195 million) again demonstrated exceptional predominately as a result of the non-recurring sale of cushion gas operational performance during in 2008. The importance of gas storage in meeting the UK’s future energy 2009 with overall reliability in requirements was highlighted once again in January 2010, as National Grid issued ‘Gas Balancing Alerts’ on three days in excess of 98%. a week, having only ever issued one previously. Rough supplied around 10% of UK gas demand on each of these days. As the UK’s Storage UK dependence on gas imports increases, storage will play an increasingly Asset utilisation was very high during early 2009, due to colder important role in helping maintain security of supply in the UK. Financial Statements than normal weather and supply concerns caused by the dispute between Russia and the Ukraine. At the end of February, we Work continues on Centrica’s three potential storage projects, recorded the lowest Net Reservoir Volume (NRV) ever seen at that Caythorpe, Baird and Bains, which together would add around point in the production season. Then from April through to November 85bcf of storage capacity. We have now largely completed Front End sustained injection, combined with enhanced injection capability Engineering Design (FEED) for Caythorpe having previously obtained created through continued capital investment, resulted in the planning permission, FEED has commenced at Baird, and planning reservoir reaching its highest ever NRV during November. permission has been granted for the Bains onshore facility. Final investment decisions are planned for Caythorpe and Baird in 2010 Gross revenue in the period was down 5% to £266 million (2008: and for Bains early in 2011. Subject to investment approval Caythorpe £280 million), mainly as a result of the non-recurrence of the sale is expected to be operational in the storage year 2012–13 with Shareholder Information of cushion gas out of the Rough asset, which generated £26 million both Baird and Bains expected to be operational in the storage of revenue and approximately the same in profit* in the second half year 2013–14. of 2008. The average Standard Bundled Unit (SBU) storage price of 44.2p (2008: 43.8p) was marginally up on the prior year reflecting

Storage UK

For the year ended 31 December FY 2009 FY 2008 Δ% H2 2009 H2 2008 Δ% Average SBU price (in period) (pence) 44.2 43.8 0.9 46.8 38.8 21 Gross revenue (£m) Standard SBUs 201 199 1.0 107 89 20 Optimisation/other 65 55 18 35 29 21 Cushion gas sales 0 26 nm 0 23 nm Total 266 280 (5) 142 141 0.7 External revenue (£m) 196 221 (11) 101 101 0.0 Cost of gas (£m) 19 22 (14) 8 11 (27) Operating profit (£m)* 168 195 (14) 95 102 (7)

Centrica plc Annual Report and Accounts 2009 17 Operating Direct Energy Review

We will look to grow leadership positions in deregulated markets

The North American North America Profitability* from our North American business was down macroeconomic environment was year-on-year. Operating profit* was down 29% to £153 million showing signs of recovery towards (2008: £215 million) and on a constant currency basis was down 38%. However it was broadly flat after removing the impact of one-off the end of 2009, with the US charges in the residential energy business which, given the impact lower wholesale commodity prices had on our upstream business, economy out of recession and was a good underlying result. North American revenue was up 5% to unemployment beginning to £6,108 million (2008: £5,824 million), but was down 7% on a constant currency basis, as higher revenue from business energy supply fall from its peak of over 10% growth was more than offset by commodity price falls in residential in October. However, consumer energy and upstream and wholesale. Although wholesale forward commodity prices remain low in 2010, confidence remained low during our North American business is well placed, both upstream and 2009 and against this backdrop downstream. We are the third largest supplier of power to the residential market in Texas and have built up a significant presence wholesale commodity prices in the US North East, where we now have more than 500,000 customers. We have also significantly increased the scale and were depressed. profitability of our business energy division following the acquisition of Strategic Energy, and are positioned as the third largest commercial and industrial power supplier in North America. We have invested in upstream assets to support our downstream positions and have an energy related services base in key markets. Under new management we will now look to grow leadership positions in deregulated markets, investing for incremental growth and value, with the aim over time of further developing the integrated energy model. We will do this alongside continuing to focus on improving returns from the existing business. Residential energy supply Our residential energy business produced a good underlying performance, as a decline in customer numbers in Canada and Texas was broadly offset by an increase in the US North East customer base. In our Canadian deregulated markets we scaled back on sales of fixed-price long-term contracts, where the level of capital support required is higher. In Texas we saw a slight reduction in customer numbers, as we delayed price cuts in order to maintain underlying margins on pre-hedged load in the first quarter. However in the US North East we have grown our customer base by around 150,000 to over 500,000 as authorities look to open up their markets to competition, offering the prospect of further growth for the future.

18 Profitability* reduced in 2009, primarily as a result of a one-off write- basis. The scale of our commercial and industrial operations has off of £45 million of final debt in Texas following a review of bad debt grown considerably over the last two years, with both revenues and Review – Business Report Directors’ provisioning in the first half. Debt collection rates have been impacted electricity volumes having more than doubled. by the poor economic climate and the resulting increase in mortgage We also realised cost synergies exceeding our target of US$15 foreclosures, however better debt management processes have million resulting from the integration of Strategic Energy, and delivered resulted in an improvement in recent collection rates. Following a gross margin expansion as we looked to recover the increased cost subsequent review of the balance sheet we identified further one-off of credit support for forward purchases for our customers. As a result items totalling £16 million relating to prior years which impacted the operating margin* increased to 1.4% (2008: 0.5%) and operating profit* result recorded in the second half of the year. Excluding the impact from our business energy segment was more than three times that of the one-off charges, the operating margin* percentage rose to of the previous year at £34 million (2008: £11 million). On a constant 5.9% (2008: 5.2%). We have now brought our Texas operational team currency basis profit* was up by 143%. back in house to reinforce our customer service focus. Moving forward the newly appointed management team and a geographical Residential and business services organisational structure will bring an improved focus on cost Trading conditions for our services business remained difficult as reduction and customer retention through price competitiveness. This the decline in new housing construction in the US continued. We will position the business well in its key markets for the longer term. also experienced a small decline in the number of customer accounts in Canada, as our waterheater business faced stronger competitive – Governance Report Directors’ Revenue was broadly flat at £2,644 million (2008: £2,652 million) and pressures, although we did see growth in protection plans. down 12% on a constant currency basis. Operating profit* before one-off items was up 13% to £155 million (2008: £137 million), down Despite the harsh trading environment, operating profit* was up 13% 1.3% on a constant currency basis, and after one-off items was to £18 million (2008: £16 million) and flat in constant currency terms, down 31% to £94 million. as efficiency improvements helped to offset the weak economic climate. As a result operating costs were lower in 2009 than in 2008. Business energy supply Revenue was up 8% to £406 million (2008: £375 million) and down Our business energy supply division performed strongly in 2009, 4% on a constant currency basis. benefiting from the full-year effect of the Strategic Energy acquisition in June 2008. Electricity volumes increased by 22% on the prior year, Following the appointment of new management, we have reviewed whilst gas volumes increased by 14% and revenue was up 24% to the structure of the services business. We now have a sales process £2,491 million (2008: £2,015 million) or 9% on a constant currency in place to exit our Canadian home appliance repair business, as the Financial Statements North America

For the year ended 31 December FY 2009 FY 2008 Δ% H2 2009 H2 2008 Δ% Residential energy supply Customer numbers (period end) (’000) 3,075 3,092 (0.5) 3,075 3,092 (0.5) Revenue (£m) 2,644 2,652 (0.3) 1,190 1,281 (7) Operating profit (£m)* 94 137 (31) 48 76 (37) Operating margin (%) 3.6 5.2 (1.6) ppts 4 5.9 (1.9) ppts

Business energy supply Shareholder Information Gas sales (mmth) 689 603 14 289 241 20 Electricity sales (GWh) 33,430 27,411 22 17,942 18,183 (1.3) Revenue (£m) 2,491 2,015 24 1,180 1,303 (9) Operating profit (£m)* 34 11 209 14 3 367 Operating margin (%) 1.4 0.5 0.9 ppts 1.2 0.2 1.0 ppts Residential and business services Customer numbers (period end) (’000) 2,111 2,140 (1.4) 2,111 2,140 (1.4) Revenue (£m) 406 375 8 205 207 (1.0) Operating profit (£m)* 18 16 13 15 13 15 Operating margin (%) 4.4 4.3 0.1 ppts 7.3 6.3 1.0 ppts Upstream and wholesale energy Gas production volumes (mmth) 375 365 2.7 189 182 3.8 Power generated (GWh) 4,982 4,688 6 2,775 2,342 18 Revenue (£m) 567 782 (27) 182 581 (69) Operating profit (£m)* 7 51 (86) 10 32 (69) North America revenue (£m) 6,108 5,824 4.9 2,757 3,372 (18) North America operating profit (£m)* 153 215 (29) 87 124 (30)

Centrica plc Annual Report and Accounts 2009 19 Operating Direct Energy Review continued diverse nature of this market has made it difficult to generate made in the first half of 2008, as we chose to defer development adequate returns. We will refocus to grow our presence in the energy activity in the low price environment. We instead made three small- related services market, particularly in those areas where we have scale acquisitions and as a result our reserves base increased slightly a strong energy base, and will look to capitalise on opportunities to 400 billion cubic feet equivalent (bcfe) by the end of 2009, even around energy efficiency. after accounting for in-year production. Upstream and wholesale energy The wholesale business suffered from some loss-making power The economic downturn and the subsequent low wholesale auction positions, as power bought to cover expected load was commodity price environment in the US and Canada resulted in sold back into a lower priced market, while the stable and low prices profitability* substantially below 2008 levels at £7 million (2008: resulted in fewer proprietary trading opportunities and profit* here £51 million). was much reduced. Our upstream gas business in Alberta was heavily impacted as the Power generation volumes were up by 6% as the thorough achieved sales price fell by 29% to C$5.1 per gigajoule (GJ), although maintenance on our three power plants in Texas, carried out when this was higher than the average spot price of C$3.6 per GJ as we prices were low in the first half of the year, resulted in increased saw some benefit from prior period forward sales. This low gas price availability and lower outages. The Texas power price remained low resulted in gas production volumes increasing by only 3% despite the throughout the year, however we benefited from prior period forward full-year impact of the acquisitions of Rockyview and TransGlobe sales and as a result profitability* was improved year-on-year.

North America with comparator year of 2008 restated to remove effect of foreign exchange movements

For the year ended 31 December FY 2009 FY 2008^ Δ% H2 2009 H2 2008^ Δ% Revenue Residential energy supply 2,644 3,006 (12) 1,190 1,372 (13) Business energy supply 2,491 2,283 9 1,180 1,392 (15) Residential and business services 406 423 (4.0) 205 222 (8) Upstream and wholesale energy 567 889 (36) 182 630 (71) North America revenue 6,108 6,601 (7) 2,757 3,617 (24) Operating profit* Residential energy supply 94 157 (40) 48 75 (36) Business energy supply 34 14 143 14 2 600 Residential and business services 18 18 0.0 15 14 7 Upstream and wholesale energy 7 57 (88) 10 35 (71) North America operating profit* 153 246 (38) 87 126 (31)

^ restated at 2009 weighted average exchange rate * including joint ventures and associates stated gross of interest and taxation, and before other costs and depreciation of fair value uplifts to property, plant and equipment from Strategic Investments and exceptional items and certain re-measurements

20 Business Corporate Responsibility Review Review

Our society is resolved to reduce levels of Review – Business Report Directors’ Managing our carbon in the atmosphere and to secure energy supplies for the future. Centrica can business impact help achieve these goals and is keenly aware of its responsibilities. Mary Francis CBE, Senior Independent Director and Chair of the Corporate Responsibility Committee Directors’ Report – Governance Report Directors’

We believe that being a responsible business is fundamental to our At Centrica, we believe that a long-term success and contributes to a healthy business environment. business must be alert to the It is essential to maintaining our reputation with customers, investors, regulators and other external stakeholders – because it reflects the impact it has on the society and principles which they value. For the same reason, it enables us to recruit and retain the most talented and capable people. Consequently, the physical environment in which we set ourselves high standards in all areas of responsible behaviour, it works and that it should do what including business integrity, environmental stewardship, fairness to it can to contribute to the health customers, employment and community support. Even in a year in which all businesses were preoccupied with short- and sustainability of both. That term financial and economic concerns, we held true to these principles. Financial Statements In particular we continued to develop and expand our workforce to is what we mean by corporate install the low carbon technologies of the future, including solar panels responsibility. and microCHP units, and to advise our customers on using energy more efficiently. Leadership in these services will position Centrica both to contribute to and benefit from, the progressive transition to a low carbon economy which our society has set as its goal. We also took further steps to reduce the carbon intensity of our energy generation and to improve the security of the UK’s energy supplies. We expanded Centrica’s investment in wind power and Shareholder Information consolidated our upstream base through our acquisitions of Venture and a 20% stake in British Energy. Below is a summary of Centrica’s corporate responsibility (CR) performance in 2009. Further details can be found at www.centrica.com/responsibility. Strategy and governance In 2009 we reviewed carefully where we should focus our corporate responsibility efforts, aided by feedback from external stakeholders in the UK and North America. We gave highest priority to the seven areas where Centrica is expected to have the greatest long-term impact and where our stakeholders have the highest expectations of us. These were: • to contribute to the transition to a low carbon society; • to invest in secure energy supplies for our customers; • to be trusted by our customers and support the most vulnerable; • to keep our employees safe and healthy at work; • to develop our employees; • to support local communities; and • to ensure responsible procurement. The Board of Directors continued to exercise oversight over the CR programme through the Corporate Responsibility Committee. The Committee approves our overall CR strategy, sets stretching targets and challenges the Group’s performance and alertness to external Centrica plc Annual Report and Accounts 2009 21 Business Corporate Responsibility Review Review continued developments. The Executive Committee, chaired by the Chief British Gas is well positioned to deliver energy efficiency services Executive, has overall responsibility for implementing the CR strategy. over and above its regulatory obligations. We have an existing network of over 9,000 engineers and are the UK’s leading supplier Our business principles (listed on page 3) are the foundation of our of A-rated high-efficiency boilers. We are increasing our partnerships responsible approach. We reviewed our business principles in 2009 with local authorities to provide advice and services to help their to ensure that they continue to embody the highest standards of tenants save energy and reduce their bills, and are working closely ethical behaviour. We are following this up with a programme to raise with banks on a range of options to provide affordable financing. awareness and compliance with the principles across the Group One example is a ‘pay as you save’ scheme being trialled with the in 2010. Energy Saving Trust whereby customers pay for energy efficiency Business Unit Managing Directors have provided strong operational services and microgeneration through long-term payment plans. leadership for our CR work in 2009, supported by specialist functions Investing in microgeneration at Group level such as risk management and internal audit. Further We continued to invest in promising microgeneration technologies details on how our CR-related risks are managed can be found on in 2009 with British Gas acquiring a stake in Econergy, a leader in pages 29 to 34. biomass heating – another step in developing a broad range of During the year, the CR Committee agreed a set of high level key renewable, energy efficient and low carbon microgeneration performance indicators (KPIs) to monitor our progress and help us technologies for British Gas customers. continually improve performance. The KPIs and performance against In the US, Direct Energy introduced the Climate Master geothermal them are included in this report. heating and cooling systems for residential customers. Climate We keep our targets and KPIs under review and in some areas we Master geothermal is a highly efficient system using natural have changed the way 2010 performance will be measured to better underground heat to cut energy use and carbon emissions. reflect our business aspirations or to challenge ourselves against Smart meters more relevant metrics. Further work is still required to develop a set During 2009 British Gas installed more than 50,000 smart meters of KPIs that fully reflects our commitment to setting clear targets and in businesses and homes across the UK. Smart meters provide objectives across the Group. Making progress in this area will remain energy usage information directly to both the energy supplier and the a priority for the Committee in 2010. customer. We plan to help our customers use this information so that CR priority: to contribute to the transition to a low they can consume less energy, thereby cutting carbon emissions carbon society and saving money. We share the widespread disappointment with the inconclusive In December 2009 the UK Government announced that energy outcome of the Copenhagen climate change conference in December suppliers will be responsible for installing and maintaining smart gas 2009. We firmly believe that man-made climate change is a problem and electricity meters in 26 million properties over the next 10 years which requires urgent and sustained global action if we are to avoid – a total of 47 million by 2020. severe social, economic and environmental consequences. We want British Gas is setting up a new business called British Gas Smart to see a robust climate change agreement that provides a clear and Metering to deliver this task. In 2009, we committed to create around sustainable framework for EU and US energy policy. 4,100 skilled green jobs by 2011 – 2,600 within British Gas Smart Centrica already has an important role to play in assisting the Metering and 1,500 new jobs for wind farm designers, energy efficiency transition to a low carbon society. We are committed to be the surveyors and engineers. We opened two new training academies in leading supplier of advice and services on low carbon solutions 2009 – in Hamilton near Glasgow and in Leicester. In 2009, we for our customers – from microgeneration to efficient, low carbon employed 250 new apprentices and invested £24.5 million in training. heating installations. We are also committed to targets for reducing Similar approaches are being evaluated in North America. With the carbon intensity of the energy that we source and generate e-Radio USA, Direct Energy is promoting a system to help through our upstream operations. consumers cut electricity usage. It sends alerts and commands to appliances and smart devices instructing them to switch off or Our 2009 Our 2008 reduce consumption at set times during peak periods. Through KPI performance performance Lifetime carbon savings from energy another partnership, Direct Energy is developing a blueprint for an efficiency products provided to uk energy efficient home in which appliances can communicate with households (tonnes) Our 2009 commitments: Provide energy efficiency each other and can be turned on and off remotely. We are piloting products in 2009 with total lifetime carbon savings of the project through our energy customer network. 13.2m tonnes of CO2 to meet our CERT obligation1 What’s next: Provide energy efficiency products in 2010 with total lifetime carbon savings of 14.6m 1 Our 2009 Our 2008 tonnes of CO2 to meet our CERT obligation m m 17.53 1 7 . 8 7 KPI performance performance 1 – See page 26 for footnote Carbon intensity of our UK power generation (g CO2/kWh) Advising on energy efficiency Our 2009 commitments: Reduce our carbon intensity to 380g CO2/kWh by 2012 and 350g CO2/kWh by 2020 Using energy more efficiently is the cheapest and easiest way for What’s next: Following 2009 acquisitions, reduce our our customers to reduce their energy bills and carbon emissions. carbon intensity to 270g CO2/kWh by 2012 and 260g 2 CO2/kWh by 2020 370 379 The UK Government is encouraging both domestic and commercial 2 – 2009 data subject to final verification energy efficiency as a key part of meeting its carbon targets. Under the Carbon Emissions Reduction Target scheme (CERT), energy Investing in low carbon generation suppliers like British Gas are required to provide energy saving The UK has adopted binding targets to reduce greenhouse gas services such as loft and cavity wall insulation. The products we emissions by 34% by 2020 and 80% by 2050. Centrica has an supplied through the scheme in 2009 will save 17.53 million tonnes important contribution to make to the achievement of these targets of carbon dioxide over their lifetimes. We are well on target to through the way it manages emissions from its upstream activities, achieve our current CERT carbon savings goal. 22 For more information, go to www.centrica.com/responsibility such as electricity generation. In 2009 we made significant progress CR priority: to invest in secure energy supplies through our investments in wind and nuclear generation. for our customers Review – Business Report Directors’ During the year, the 194MW Lynn and Inner Dowsing wind farms In the UK, the liberalised energy market has proved central to became fully operational and we announced plans to construct a new securing energy supplies whilst providing customers with the lowest 270MW wind farm off the coast of Lincolnshire. This major investment domestic gas prices in Europe. But further investment is needed if decision followed the UK Government’s decision in April 2009 to we are to maintain our security of supply in a way which will also temporarily enhance the level of support provided for new offshore meet our targets for reducing carbon emissions. According to the wind projects. energy regulator Ofgem, some £200 billion needs to be invested by 2025 in the UK alone. We were also awarded exclusive rights to develop the Irish Sea zone as part of The Crown Estate’s Round 3 offshore wind tendering Centrica has already made significant investments to maintain process. The zone gives us the potential to deliver up to an additional supplies for our customers. During 2009, in the UK we invested 4.2GW of offshore wind farm capacity, enough power for over more than £4 billion in sources of gas, power generation and gas three million British Gas homes. storage assets and have plans to spend an additional £15 billion in the UK by 2020. We believe that if the UK Government and regulator In 2009, Centrica acquired a 20% stake in the nuclear generator establish the right market frameworks, then industry can deliver

British Energy from EDF, further details of which are on page 15. – Governance Report Directors’ this investment. Nuclear energy has minimal carbon emissions and provides reliable baseload power (which wind cannot do). It is thus an important part In 2009, Centrica acquired significant new UK gas production assets of Centrica’s, and the UK’s, energy portfolio. through our takeover of Venture. The Venture operations will form part of our Centrica Energy business, and we will integrate them into We measure the impact of our generation activities on the our CR programme and 2010 reporting. atmosphere by tracking ‘carbon intensity’. Carbon intensity measures the efficiency of power generation and is defined as the amount of Also in 2009, we completed the acquisition of a 20% stake in British carbon dioxide emitted per unit of electricity generated from our Energy, owned by EDF. British Energy operates eight of the 10 UK power generation assets and site-specific contracts. In 2009, the nuclear power stations and will have a significant role in the carbon intensity of our UK power generation was 370g CO2/kWh*, development of the next generation of nuclear power. a reduction of 2% compared to 2008 that mainly reflected the As a result of the Venture and British Energy transactions, we are additional wind farm capacity within our generation portfolio. The now able to supply about 60% of our customers’ gas and power purchase of the stake in British Energy and more planned investment demand from our own assets – a significant increase from 2009. in renewable energy will mean that we can reduce carbon intensity Financial Statements We are likely to continue investing to acquire and develop gas further. We have therefore set new targets for the carbon intensity production assets in the UK and Norwegian continental shelf and of our power generation to 270g CO2/kWh by 2012 and 260g CO2/ further afield in future years to provide the necessary energy security kWh by 2020, reflecting improved carbon intensity performance of for our customers. more than 30% in the next 10 years. For more information on our carbon intensity performance see page 9. In recognition of the importance of gas storage in meeting the UK’s future energy requirements we are evaluating three additional gas We are steadily increasing the proportion of Centrica’s power which storage projects, which would increase total UK storage capacity is generated by low carbon technology, including wind and nuclear. by around 50%. At the end of 2010, it is forecast to account for around a quarter of our output from our own power generation assets and under A significant contribution to future UK gas supplies will come from Shareholder Information site-specific contracts. liquefied natural gas (LNG). By 2017 we expect that LNG will grow to more than 25% of UK total gas supply. The UK currently has two Our 2009 Our 2008 main LNG import centres with terminals at Milford Haven, South KPI performance performance Wales and the Isle of Grain in Kent. Year-on-year percentage reduction in energy (electricity and gas) consumption Major investment has taken place to enable huge LNG tankers to savings across our UK property portfolio3 Our 2009 commitments: Achieve a 5% year-on-year unload at the UK terminals. Centrica has underpinned that investment reduction in UK office energy use What’s next: Achieve a 20% reduction in our Group by negotiating contracts with National Grid, owner of the Isle of Grain internal carbon footprint, including office energy terminal. We are also in discussion with major LNG resource holders use, vehicle emissions and business travel of our % % existing business by 2012 (baseline year: 2007)3 8.36 7.23 to receive deliveries via Milford Haven in South Wales, the largest LNG terminal in Europe. In 2009, Centrica imported 1.6bcm of LNG 3 – See page 26 for footnotes into the UK through the Isle of Grain terminal, with LNG contracted Cutting Centrica’s internal carbon footprint from six countries and seven LNG suppliers. We are practising what we preach in energy saving and intend our More detailed information on our 2009 investment activities can offices to be a demonstration of what is achievable for our customers. be found within the Operating Review from page 14 onwards. Since 2003, our UK business has achieved a reduction of about 40% in the energy it uses, helping to drive down our internal carbon CR priority: to be trusted by our customers and footprint by around 20%. In 2009, we achieved an 8.36% reduction support the most vulnerable in energy use across our UK properties, exceeding our 5% target. We are committed to treating our customers fairly at all times. We While pleased with this progress, we are challenging ourselves to do believe that gaining and maintaining customer trust is a fundamental more and have set a new longer term Group internal carbon footprint business objective and that a number of issues impact the level of target – a 20% reduction in the internal carbon footprint of our trust consumers have in us. Our research indicates that the most existing businesses by 2015 (baseline 2007). This will tackle the significant factors are customer service, price and support for three main sources of carbon emissions from our operations vulnerable customers. (non-generation), which are office energy, business travel and our commercial and company vehicle fleet. * 2009 data subject to final verification Centrica plc Annual Report and Accounts 2009 23 Business Corporate Responsibility Review Review continued

Green Streets

The UK carbon reduction target is 80% on 1990 levels by 2050. To find out what could be 25% achieved at a local level we ran a year-long project The project showed demonstrable benefits called ‘Green Streets’, a competition between for consumers through lower energy bills and, eight communities that promoted awareness most importantly, an average reduction in of low carbon solutions for householders and carbon footprint of almost 25%. showed how different energy efficiency solutions, allied to changes in behaviour, can deliver benefits 35mt CO2 to customers. If the Green Streets savings were replicated across UK households, we estimate that 35 The results published in March 2009 demonstrate million tonnes of CO2 would be cut from the how much can be achieved using current national carbon footprint. commercially available technologies. Building on these findings, we launched the ‘Green £6 billion Streets 2010’ community initiative in January 2010, At 2009 prices this would save £6 billion in which 14 communities will compete to reduce per annum. their energy use and carbon emissions.

Improving customer service recommend our services and benchmarks this performance against We have worked hard to improve our customer service and are our competitors. In 2009 both British Gas and Direct Energy pleased with the significant improvements shown in our customer achieved improved NPS: more detailed information is highlighted on surveys in 2009. We are in no way complacent and will continue to page 9. Further NPS improvement in 2010 remains a priority in both challenge ourselves to improve the experience we give our customers. the UK and North America. Fair and transparent pricing Our 2009 Our 2008 KPI performance performance The price that consumers pay for energy in general, and gas in Customer accounts on Essentials tariff particular, is an emotive issue in the UK and we understand the Our 2009 commitments: To manage up to 750,000 reasons for this. British Gas is committed to providing its customers Essentials accounts What’s next: Continued focus on targeting the most with the lowest price possible and was able to lower gas prices in appropriate support and resources to individual February 2010. vulnerable customers 487,995 526,500 Customers supported by British Gas Wholesale energy costs comprise around 50% of an average bill, vulnerable customer initiatives the remainder is made up of costs such as delivery of the energy What’s next: Continue to work with charity partners to deliver maximum impact to vulnerable customers 2.2m 1.4m to customers’ homes, operating costs, tax and government customer satisfaction: british gas environmental contributions. Delivery and environmental costs Net promoter score4 are both rising significantly faster than inflation. What’s next: British Gas has changed its methodology % % for 2010 and will target a score of +3 under the new system 7.0 -0.8 British Gas buys the majority of its customers’ energy needs in customer satisfaction: direct energy advance, to protect customers from the daily volatility in energy Net promoter score4 What’s next: Direct Energy aims to improve on 2009 prices and to ensure that we have enough energy to satisfy our scores under the current methodology and roll out an % % customers’ needs. So, while the wholesale prices fell sharply during improved NPS system in 2010 9.5 6.9 the second half of 2009, some of the energy our customers were 4 – See page 9 for full details using during this period was purchased up to two years ago when British Gas has made significant changes to improve systems and the wholesale price was significantly higher. train and motivate employees. Engineers’ appointments were a Supporting vulnerable customers particular area of concern and British Gas responded vigorously We have a particular responsibility to vulnerable customers who to the problem introducing a ‘call-ahead’ service. The time taken are unable to afford energy necessary to safeguard their welfare for to answer customer telephone calls continued to fall and the launch reasons of age, health, disability or severe financial insecurity. No other of the ‘We’re Listening’ campaign has provided further channels for industry commits such large amounts to helping its poorest customers. feedback and suggestions on customer service. This issue has particular focus in the UK where fuel poverty is high As a result, British Gas has reduced its share of complaints to the on the political agenda. In 2009 we introduced a targeted approach energy Ombudsman to 19%: 34% less than in 2008 and lower than to make our support more effective. Working with organisations such our market share of around 33%. British Gas has adopted the FSA’s as Help the Aged and National Debtline, we tailored our support to ‘Treating Customers Fairly’ principles (in respect of all of our insurance individual needs. For example, we focused on providing priority based products and services), and we are starting to introduce the service in cold weather for our older customers, whereas indebted principles across all other British Gas operations. customers are better supported with debt management plans. There is no centralised Ombudsman in North America so Direct Our ‘Essentials’ social programme provides a range of assistance for Energy has developed a complaints management system, which specific categories of customers eligible for state benefits, including includes monitoring complaints logged with local regulators, media, help with energy efficiency and discounted bills for those most in Better Business Bureaux and other channels. In 2009, the level of need. This includes a total of £70 million in savings for nearly 488,000 complaints dropped 63%. customer accounts in 2009. The programme, the largest in Britain, A key performance indicator of customer trust is a net promoter saved our most vulnerable customers with a dual fuel account an score (NPS) survey, which measures how willing customers are to average of £264 each, compared with standard payers. 24 For more information, go to www.centrica.com/responsibility

In total, British Gas provided more than £80 million of support Our future success depends on attracting and retaining the best through a range of initiatives for around 2.2 million vulnerable people. To create an environment in which all employees can flourish Review – Business Report Directors’ households in 2009. This was more than the total support provided we are committed to supporting skills development, promoting equal by all other major UK energy suppliers. We reached 750,000 more opportunities and diversity and providing regular opportunities for households than in 2008, an increase largely due to the number of open employee engagement. people needing debt assistance. Centrica is committed to regular communication and consultation We are sharing our expertise from the UK to improve support for with employees through briefings, meetings, emails, information vulnerable customers in North America. Direct Energy helped over screens, annual roadshows with senior management, a Group-wide 175,000 customers access approximately US$22 million in bill intranet and internal magazines and newspapers. Company financial payment assistance over the year. Direct Energy also established performance is communicated to all employees using online media, a Vulnerable Customer Working Group focused on identifying the printed materials and face-to-face briefings with members of the most effective means to provide support through financial Executive Committee. assistance, products and services and advocacy with regulators. Great performance is key to our success. To deliver this each CR priority: to keep our employees safe and healthy individual’s objectives are aligned to the business strategy and at work measure both what they do as well as how they do it. Progress is tracked throughout the year as part of our performance cycle, which – Governance Report Directors’ We do not compromise on the safety of our employees. Health and also focuses on development and career planning. safety is one of our highest priorities, and from 2010 annual bonus targets for the Group’s Chief Executive and each Executive Director We are building our leadership skills for the future through a variety will each include a health and safety performance target (see page of different methods. Examples include our General Management 49 for further details). Programme aimed at growing our next generation of general managers and ‘The Leaders Journey’, a series of focused In 2009, we took steps to embed a more proactive approach to experiences designed to address key leadership traits we want managing health and safety across the Group, with a particular focus to strengthen in our business. We are expanding our training on individual leadership. Historically the performance of our upstream programme focused on smart meter installation and provision businesses has been strong, despite the inherent risks of their of low carbon services from our seven UK regional training centres. operations. Our priority in 2009 was to address the injury record in the service and repair part of British Gas, where our engineers are exposed We also run highly regarded UK summer placement and global to a wide range of different hazards when visiting domestic properties. graduate recruitment programmes, which form an important part

of our skills and recruitment strategy. In 2009, 70 graduates joined Financial Statements We ran a hard-hitting ‘What if’ safety campaign that made a personal our UK and North American schemes whilst the 2009 summer emotional connection with our engineers. This was backed by high placement programme accepted 50 applicants and won an award profile consistent attention of management to safety. The results have for Best Work Experience programme. been encouraging with a reduction in lost time injury (LTI) rate in this part of the business from 2.07 in 2008 to 0.74 in 2009. We believe Employee engagement this is still too high and are targeting continued reductions through We need to create an environment in which our employees are a new Group safety, health and wellbeing policy and strategy. fully engaged with our business objectives. We track employee engagement through a range of questions in our annual employee

Our 2009 Our 2008 survey, a confidential process administered by an independent KPI performance performance third party. Shareholder Information GROUP Lost time injuries (LTI)/100,000 hours worked Our 2009 commitments: 20% LTI reduction on 2008 Our 2009 Our 2008 performance to 0.8 KPI performance performance What’s next: 12.5% LTI reduction on 2009 performance to 0.43 Percentage of employees engaged at 0.49 1.00 Centrica (measured through the Employee Fatalities Engagement Survey4) 0 1 Our 2009 commitments: Employee engagement score of 60% by 2009 and 62% by 2010 What’s next: The next full global survey will be Overall the Group’s LTI rate per 100,000 hours worked improved conducted in June 2010. Each part of the business from 1.00 in 2008 to 0.49 in 2009. will aim to improve their individual scores to achieve a Group score of more than 66%, ensuring we remain % % Our entry into the UK’s nuclear industry brings specific challenges as in the high performance category. 66 57 the radioactivity associated with nuclear power generation introduces Employee gender (female/male %) different safety risks relative to conventional sources of power 30/70 30/70 generation. Radiation emissions and radioactive waste must be Employees from ethnic minority groups % % 15.5 15.3 contained and handled safely. 4 – See page 9 for full details As a minority shareowner in EDF’s nuclear operations in the UK, we In 2009, we had an exceptionally high response rate of 90% and are not the operator of any nuclear facilities. EDF is the world’s largest the scores for engagement Group-wide increased by nine points nuclear operator and its UK nuclear subsidiary, British Energy, has an to 66% from 2008. Independent external benchmarks indicate that excellent safety record, vast experience and a record for being open organisations with engagement scores above 60% consistently and transparent. We are represented on the organisation’s board and deliver better business results. Our current overall score of 66% have established a nuclear team to manage our role within the UK’s places us in the high performance range. nuclear industry. Employee retention rates were high at 92% in 2009, compared with CR priority: to develop our employees 84% in 2008. High employee engagement scores, improved external Centrica is a major employer of a diverse and talented workforce recruitment processes and significant improvements in call centre and, during 2009, we employed an average of 34,125 people. retention rates have all contributed to more employees wanting to remain with our company. Centrica plc Annual Report and Accounts 2009 25 Business Corporate Responsibility Review Review continued

Business reorganisation contribute financially to local and national charities through payroll We undertook extensive reorganisation across our business in 2009. giving, matched funding and the employee lottery. We managed the change sensitively and in consultation with all those Centrica’s total community contributions in 2009 were £76.9 million involved. The reorganisation has meant some redundancies but also (£24 million up from 2008). Details of the causes we support are opportunities such as increased training and recruitment for provided in our online CR report. A significant proportion of the customer service advisers and service engineers. overall total relates to the support provided through the British Gas The outsourcing of some of our back office operations has been Essentials social programme. managed successfully with the involvement of trade unions and employee representatives in the UK. As we shift business activities Our 2009 Our 2008 to new regions, we ensure that our expatriate and local managers KPI performance performance understand the challenges of working in developing countries that have Total community contributions5 (£m) 76.9 52.9 different cultures, labour standards and security and health and safety procedures. Our offshore partners are audited on a regular basis, and CR priority: to ensure responsible procurement any issues raised from employee engagement surveys are pursued. Monitoring and managing social and environmental performance in Diversity and equality the supply chain is an imperative for multinational and consumer- We aim to provide a workplace that is inclusive for all our employees facing brands. and believe diversity is good for our business. We are committed to We have developed a ‘Responsible Procurement’ policy for suppliers offering equal opportunities to all people with disabilities, ensuring that outline the standards that Centrica expects of its business that we do not discriminate in recruitment, promotion, training, working partners. It translates the values of the business principles and the conditions or dismissal, subject to health and safety considerations. Responsible Procurement and Supplier Management Policy into a If employees become disabled while in our employment we offer, document that can be included in supplier contracts. wherever possible, appropriate support, retraining, equipment and facilities to enable their employment to continue. Our focus in 2009 has been on implementing the policy. We have started to introduce CR clauses into supplier contracts; are We promote workplace practices to encourage greater representation developing a risk analysis methodology and are exploring where and of women and ethnic minorities. We have conducted an Equal Pay how the responsible procurement processes can be integrated into Review for several years and are aligned to the best practice among our wider procurement systems. FTSE 100 companies. The 2009 review found that Centrica’s performance management and reward practices were not subject to Procurement and supplier management teams have been proactively gender bias. engaging with all suppliers whose contracts have been up for renewal in 2009. We prioritise the contracts which we consider We also worked with the Institute for Employment Studies to explore to present material risks to the business, based on size, brand further the reasons why there are relatively few women in senior association, intrinsic commodity or service risk, sub-contracting management positions. We are now reviewing the findings and levels and country risk. To date 101 of our strategic suppliers have recommendations and have established a steering group to drive signed contracts that included the CR clauses which came into and improve progress. effect during 2009. For 2010 we are aiming to sign 150 more. Our Group age policies and practices received two Employers Forum on Age (EFA) awards in 2009 for innovation in flexible working and Our 2009 Our 2008 innovation in attracting baby boomers. In addition we won, for the KPI performance performance supplier contracts with responsible second year running, the AARP (American Association of Retired procurement clauses Persons) Award for our HR policies and practices in the recruitment, What’s next: Sign contracts with 150 additional retention and promotion of older workers. suppliers that include CR clauses 101 n/a In May 2009, we also ran a successful supplier forum on responsible CR priority: to support local communities procurement, attended by 30 key partners, which provided an As a major employer and provider of essential energy services, opportunity to identify and confront the challenges of implementing Centrica’s wellbeing is bound up with that of the communities in which responsible procurement. we work, at both national and local level. We believe it is important to provide our employees with opportunities for community involvement. We work with our charity partners such as Save the Children to create volunteering programmes that best use our skills to support the most vulnerable in society. The range of volunteering Mary Francis CBE opportunities available to employees through our UK ‘Get Involved’ Senior Independent Director and Chair of the Corporate programme, North American ‘direct in the community’ scheme and Responsibility Committee other community initiatives are designed to allow employees to 25 February 2010 support organisations to which they have a personal connection and which match their skills and needs. We also help our employees to

1 This figure is an externally agreed target with Ofgem and subject to change, depending on our 4 For details on the net promoter score (NPS) and the Employee Engagement Survey see page 9 market share 5 Combination of figures calculated from London Benchmarking Group methodology and cost of 2 2009 data subject to final verification voluntary programmes to support vulnerable customers in the UK. Group cash donations during the 3 Group environmental targets for energy management are set in order to challenge and improve year amounted to £4.8 million (2008: £5.9 million). In line with Group policy, no donations were made performance in both building management and control and occupier behaviour. The targets do not for political purposes. The Group, in the normal course of its business, has paid for its management relate to the gross environmental footprint of Centrica’s property portfolio and as such the data is to attend events at which politicians and other opinion formers have been present, but does not normalised to smooth out the impact of adding or removing sites from our portfolio to avoid consider these payments to be political donations obscuring the performance of the property management teams and building occupiers. Data relating to the gross footprint is however recorded and disclosed separately in the corporate responsibility report 26 Business Group Financial Review Review

Providing value to Review – Business Report Directors’ shareholders 2009 was a year of sound earnings in the face of volatile markets driven by profitability across most of our businesses, with continued progress in our growth businesses. Nick Luff, Group Finance Director Directors’ Report – Governance Report Directors’

Group revenue from continuing operations was up 5% to £22.0 billion capital, lower outflow of cash collateral associated with margining (2008: £20.9 billion). Revenue in all three downstream UK businesses agreements and a decrease in cash taxes paid. increased due to a higher number of customer accounts and The net cash outflow from investing activities increased to revenue in our upstream UK segment was also slightly up due to £4,520 million (2008: £1,122 million), due primarily to the acquisition higher external sales volumes. The North American businesses were of Venture and the investment in 20% of British Energy. impacted by a fall in commodity prices, although the reduction was more than offset by the effect of a favourable exchange rate There was a net cash inflow from financing activities of £304 million movement on reported revenue. (2008: £2,603 million). 2008 included £2,164 million from a Rights Issue. Group operating profit† from continuing operations was down 9% at £1,814 million (2008: £1,992 million). Adjusted operating profit* The Group’s net debt level at 31 December 2009 was £3,136 million was down 7% to £1,857 million (2008: £2,003 million). An increase (2008: £511 million). This reflected the cash movements Financial Statements in downstream profitability, reduced losses in the industrial and described above. commercial segment and strong performance in the power During the year net assets decreased slightly to £4,255 million from generation business partially offset decreases in upstream gas £4,372 million as at 31 December 2008. Net segment assets and oil profitability caused by lower volumes and selling prices. increased following the acquisitions of Venture and British Energy Group profit† on a continuing basis was up 15% to £1,104 million and the sale of Segebel S.A. (Segebel), but this was offset by an (2008: £964 million). The increase resulted primarily from a lower tax increase in the level of net debt. charge† of £531 million (2008: £1,026 million). This decrease reflected Exceptional items the change in mix of profits, with a decrease in highly-taxed gas Net exceptional charges from continuing operations before tax Shareholder Information production profits. The resultant effective tax rate† for the Group of £568 million were incurred during the year (2008: nil). A charge was 32% (2008: 52%). Net interest expense was £179 million of £199 million related to an onerous gas procurement contract, (2008: £2 million), reflecting the higher level of debt during the year. and a charge of £139 million related to the termination of an Despite the increase in Group profit†, adjusted earnings per share^ out-of-the-money energy sales contract in the industrial and (EPS) was unchanged at 21.7 pence (2008: 21.7 pence) reflecting the commercial segment of upstream UK. A provision of £55 million was higher number of shares in issue following the Rights Issue in 2008. recognised for North American wind power purchase agreements, The statutory profit for the year was £856 million (2008: loss of to reflect the fair value of the obligation to purchase power above its £136 million). The reconciling items between Group profit† and the net realisable value. Impairments of £149 million relating primarily to statutory profit are related to exceptional items, certain upstream gas and power assets in the UK and North America were re-measurements and discontinued operations. The Group reported incurred, arising from declining commodity prices and changing a statutory basic EPS of 16.5 pence, up from basic loss per share of market conditions and an exceptional charge of £75 million relating 3.3 pence in 2008, mainly reflecting the reduction in the post-tax to restructuring in downstream UK and in upstream UK was incurred. impact of certain re-measurements. Also within continuing operations, profit on disposal of £49 million was made on the sale of the equity interest in GLID Wind Farms In addition to the interim dividend of 3.66 pence per share, we TopCo Limited. In discontinued operations a £297 million profit on propose a final dividend of 9.14 pence, giving a total ordinary disposal was made on the sale of Segebel and charges of £24 million dividend of 12.8 pence for the year (2008: 12.2 pence), an increase were incurred in respect of previously capitalised customer of 4.9%. acquisition costs in The Netherlands. Group operating cash flow from continuing operations before movements in working capital was down 12% to £2,183 million (2008: £2,478 million). After working capital adjustments, operational * including joint ventures and associates stated gross of interest and taxation, and before other costs interest, tax, cash flows associated with exceptional charges in prior and depreciation of fair value uplifts to property, plant and equipment from Strategic Investments years and cash flows from discontinued operations, this stood at and exceptional items and certain re-measurements £2,647 million (2008: £297 million). This significant increase in ^ as above, except after other costs and joint ventures and associates stated net of interest and operating cash flow is due primarily to an improvement in working taxation † including joint ventures and associates stated net of interest and taxation, and before exceptional items and certain re-measurements Centrica plc Annual Report and Accounts 2009 27 Business Group Financial Review Review continued

Certain re-measurements Principal risks and uncertainties In our business we enter into a portfolio of forward energy contracts The Group’s risk management process remains unchanged from which include buying substantial quantities of commodity to meet 31 December 2008. A description of the impact of the volatility in the future needs of our customers. A number of these arrangements wholesale commodity prices and the weakness of credit markets are considered to be derivative financial instruments and are required on financial risk management is provided in note 4. to be fair-valued under IAS 39. Fair valuing means that we apply Capital management the prevailing forward market prices to these contracts. The Group Details on the Group’s capital management are provided in note 5. has shown the fair value adjustments separately as certain re-measurements as they are unrealised and non-cash in nature. Related party transactions The profits† arising from the physical purchase and sale of Related party transactions are described in note 40. commodities during the year, which reflect the prices in the Events after the balance sheet date underlying contracts, are not impacted by these re-measurements. On 5 February 2010, 50% of the issued share capital of Centrica The statutory results include net charges to operating profit relating (Lincs) Limited (Lincs) was sold to Dong Wind (UK) Limited and to these re-measurements of £71 million (2008: £1,331 million) from Siemens Project Ventures GmbH for £50 million. Centrica has continuing operations, primarily from marking-to-market some retained 50% of the issued share capital of Lincs and Centrica’s contracts relating to our energy procurement activities. As gas and investment in Lincs is accounted for as a joint venture from this power were delivered under these contracts, net out-of-the-money date due to the joint control that arises from this transaction. mark-to-market positions from year end 2008 were unwound On 12 February 2010 the Group redeemed £250 million of debt generating a net credit to the Income Statement in the period of with a maturity date of 12 December 2011. £928 million (2008: £10 million). As forward prices decreased in the second half of the year the portfolio of contracts fair valued under On 25 February 2010 the Group announced that it had agreed to IAS 39 reported a net charge on revaluation of £1,097 million acquire a portfolio of Trinidad and Tobago gas assets from Suncor (2008: £1,337 million). The termination of an out-of-the-money Energy Inc. for approximately US$380 million (£246 million) in cash, energy sales contract, described above, resulted in a credit within subject to certain conditions being satisfied. certain re-measurements of £135 million. The remaining charge The Directors propose a final dividend of 9.14 pence per ordinary of £28 million (2008: £4 million) reflects positions relating to share (totalling £470 million) for the year ended 31 December 2009. cross-border capacity and storage contracts. There were also net The dividend will be submitted for formal approval at the Annual losses arising on re-measurement of associates’ energy contracts General Meeting on 10 May 2010 and, subject to approval, will (net of taxation) of £9 million (2008: nil). be paid on 16 June 2010 to those shareholders registered on The net loss of £71 million on the re-measurement of energy 30 April 2010. contracts largely represents unrealised mark-to-market loss created Accounting policies by gas and power purchase contracts which are priced above the UK listed companies are required to comply with the European current wholesale market value of energy. This loss is calculated with regulation to report consolidated financial statements in conformity reference to forward energy prices and therefore the extent of the with International Financial Reporting Standards (IFRS). The Group’s overall economic profit or loss arising over the life of these contracts significant accounting policies, including changes of accounting is uncertain and is entirely dependent upon the level of future presentation, are explained in note 2. Note 3 to the Financial wholesale energy prices. Statements explains the critical accounting judgements and key Business combinations and capital expenditure sources of estimation uncertainty arising in the preparation of the In January 2009, the Group acquired the remaining 50% of the Financial Statements. issued share capital of Segebel for cash consideration of £544 million (including deferred consideration of £62 million), bringing the Group’s total ownership interest in Segebel to 100%. Segebel holds a controlling stake of 51% in SPE S.A., a Belgian energy company.

This business was subsequently sold to EDF Belgium S.A. for Nick Luff €1,325 million (£1,205 million) on 26 November 2009, as part of Group Finance Director an inter-conditional transaction in which Centrica acquired a 20% 25 February 2010 interest in Lake Acquisitions Limited, owner of British Energy, for £2,255 million. The Group also acquired 100% of the issued share capital of Venture for a total consideration of £1,253 million in a series of transactions occurring between 18 March 2009 and 9 November 2009. The Group acquired a controlling interest in Venture on 27 August 2009, and Venture was therefore consolidated as a subsidiary of the Group from this date. The Group also initiated a process to sell its businesses in The Netherlands and Spain, being Oxxio B.V. and Centrica Energía S.L. respectively. Together with Segebel, these businesses have been accounted for as discontinued operations. * including joint ventures and associates stated gross of interest and taxation, and before other costs and depreciation of fair value uplifts to property, plant and equipment from Strategic Investments During the year, a number of other smaller acquisitions were and exceptional items and certain re-measurements completed for total cash consideration of £32 million, as explained ^ as above, except after other costs and joint ventures and associates stated net of interest and in note 37. taxation † including joint ventures and associates stated net of interest and taxation, and before exceptional Details of capital expenditure are provided in note 6(e). items and certain re-measurements 28 Business Principal Risks Review and Uncertainties

Managing our risks Review – Business Report Directors’ Centrica, like all businesses, faces a number We place considerable importance on internal controls of risks and uncertainties that could affect the and have a robust risk management process (as detailed in the Corporate Governance Report on pages delivery of the Group’s strategic objectives. 38 to 43), which is designed to identify, manage and Nick Luff, Group Finance Director mitigate business risk in order to support the creation of long-term, sustainable returns for shareholders. Described below are the principal risks and uncertainties the Group can foresee. It is not an exhaustive list; some future risks may be as yet unknown and other risks, currently regarded as immaterial, could turn out to

be material. – Governance Report Directors’

External market factors

Global economic conditions

Description: Over the past 12 months we have experienced A double-dip recession or slow recovery could lead to a further an economic downturn that has been longer and deeper than reduction of income for the Group. previous recessions. Recently the global economy appears to Mitigation: Although bad debt charges rose year-on-year, be expanding again, pulled up by the strong Asian economies reflecting the weak economic conditions, improved credit and stabilisation and recovery elsewhere. While the US and the management and cash collection processes have helped UK have emerged from recession, there is still the potential for to mitigate much of this increase. a double-dip recession. The pace of the global recovery is slow, Financial Statements uncertain and activity remains weak. Our risk management process has helped identify and manage the increased financial risks and we have ensured that sufficient Impact: Unlike previous recessions where utilities were less liquidity is available to allow the Group to realise its growth affected than other sectors, this time the industry has recorded ambitions. a significant reduction in demand across all sectors. Globally, utilities have been able to continue to access both debt In the UK, North America and Europe we have experienced and equity markets but given global uncertainty and volatility in increased levels of bad debts amongst business and residential financial markets this needs to be carefully monitored. Although customers. the Group is currently appropriately funded, the future capital

As a result of the recession and financial crisis, the Group has requirements for the industry are large. Shareholder Information faced increased financial risks; ensuring liquidity is paramount to the ongoing viability of the business.

UK demand reduction

Description: UK energy consumption fell during the period Impact: Reduced sales of gas and electricity to residential 2005–2009, driven by improved energy efficiency and changing and business customers could have a significant impact on customer behaviour as a result of greater environmental the Group’s revenues and profits over the next decade. awareness, fallout from past price increases and the general Mitigation: The Group is monitoring closely its forecasts economic downturn. for gas and electricity demand. In the UK, gas demand is forecast to continue to decline The growth in demand for energy efficiency is in turn creating over the next decade with electricity demand reducing by demand for such products as microgeneration, insulation and a smaller amount. smart metering. We are well placed to grow in these markets The actual outcome for long-term gas demand will ultimately and in 2010 we are taking a number of steps to capitalise on be driven by industry decisions around generation mix and the these new opportunities. impact of Government climate change initiatives.

Centrica plc Annual Report and Accounts 2009 29 Business Principal Risks and Review Uncertainties continued

Regulatory environment

Description: Government targets to reduce UK greenhouse Canadian federal efforts now largely depend on progress in the gas emissions are increasingly shaping energy policy, including US. The federal government has dropped its original national plans to expand renewable generation sixfold. The UK’s energy target in favour of developing something resembling US federal infrastructure will require significant amounts of new investment legislation as and when it emerges. In Ontario, in particular, the in order to meet these targets while maintaining security of regulatory environment remains uncertain. supply, with estimates of around £200 billion required by 2025. Impact: A number of factors could cause uncertainties This has prompted calls by many, including the regulator, for surrounding the Group’s future investment decisions and limit more fundamental market reform. the Group’s ability to meet its long-term growth aspirations. Significant reforms to the planning regime have been introduced, These include: the potential for a Competition Commission nevertheless planning is still likely to have an impact on the inquiry; the delivery of reforms to the planning regime; market deliverability of investment. conditions that support new nuclear power; and the impact of future OTC derivatives regulation in Europe and the US. Renewables continue to require a supportive policy and regulatory climate in order to deliver the investment needed. Mandated social price support for vulnerable customers will The Government is in the process of addressing regulatory and impact on the development of the Group’s own social initiatives other barriers to new nuclear power. There remain other policy and the outcome of debates about future energy efficiency could issues, such as the currently low carbon price following the impact the long-term growth of our residential business, and our recent Copenhagen climate conference, which resulted in ambition to provide home energy solutions to our customers. an outcome that did not give business the clear framework The outcome from Copenhagen means the case for a unilateral it wanted. UK mechanism to underpin the carbon price may strengthen in Parliament is considering proposals to introduce mandatory order to meet the UK’s own more stretching targets. The social price support for vulnerable customers to replace the likelihood and shape of any US cap and trade legislation remains successful voluntary approach in place to date and the future primarily dependent on domestic factors. framework for delivering and financing energy efficiency remains Mitigation: Our activity to manage political and regulatory uncertain. policy developments is ongoing and we are taking a number It is possible that following a general election there may be a of steps to address these risks. Competition Commission inquiry or equivalent review into the Internally, we have established a Policy Group to agree Group- energy sector. This would follow the recent investigation by the wide positions on each key issue. regulator and would create significant uncertainty in the investment climate. Externally, we have been closely engaging with civil servants, politicians and opinion-formers to ensure that the Group’s In Europe, the Commission is considering stricter regulation perspectives are reflected in policy debates. of over-the-counter (OTC) derivatives, which is also being considered in the US by the Obama Administration. Media relations and external-facing CR programmes are designed to reinforce our views on policy and to build North American energy markets still have some way to go before knowledge and trust in the business among wider stakeholder there is widespread liberalisation and clear, consistent climate audiences. change mitigation policies. Limited action at a federal level means that the progress has mostly taken place at the state In the US and Canada, we continue to engage with regulators, and provincial level. Government ministers and senior officials through targeted contact programmes.

Competitive retail energy environment

Description: We operate in highly competitive energy supply Impact: As a result of competitor activities the Group may lose markets in the UK and North America where customers switch market share which could affect profitability and the ability of the suppliers based on price and service levels, as well as competitor Group to meet its growth aspirations. activity. We also operate in the home services market. These Uncompetitive pricing may lead to customer losses and have competitive markets have consistently delivered lower prices an adverse impact on profitability. to consumers than their regulated counterparts. Mitigation: To retain our competitive position, we aim to be In the UK, competitive pressures are increasing as many of the competitive on price and combine attractive products and key participants, namely energy and other service providers propositions with high quality customer service and, for energy such as insurance companies, have entered the services market supply, buy energy competitively. and are seeking to strengthen their positions. In North America the economic environment is making trading more difficult, We actively monitor customer satisfaction and competitor particularly in the new home construction business. In addition, activity, and respond to changing circumstances by developing new entrants in the waterheater rental business in Ontario are new customer offerings, whilst maintaining tight operational creating additional competitive pricing and service pressures. cost control.

30 Exposure to movements in commodity prices Review – Business Report Directors’

Description: A significant proportion of the Group’s profitability through to our customers or fail to pass on decreased depends on our ability to manage our exposure to wholesale commodity prices, those customers may switch to our commodity prices for gas, oil, coal, carbon and power. The price competitors, which could have an adverse effect on our business. of gas in the UK is particularly important, as we produce The volatility of commodity prices impacts the effectiveness of substantially less gas from our own resources than we need hedging decisions for the downstream customer portfolio and to meet retail demand and demand from our fleet of gas-fired investment decisions in the upstream businesses, potentially power stations. leading to lower profits and lower than expected returns. The Group must assess the risk of procuring commodities at Mitigation: We manage these risks by hedging a proportion fixed prices to meet uncertain levels of demand that are subject of the exposure for a number of years ahead, linked to the to seasonal fluctuations. underlying profiles of our customers’ energy requirements. This In addition, upstream acquisitions made in higher commodity is done through purchasing and developing upstream assets price environments may be subject to balance sheet such as gas fields, power stations and wind farms, bilateral

impairments during lower commodity price environments. agreements for gas and power, purchases of commodities on – Governance Report Directors’ recognised exchanges and the use of financial instruments such Impact: With volatile prices, there is a risk that surplus as oil and gas swaps. commodity positions cannot be sold to the wholesale markets profitably and that any commodity shortages cannot be covered We regularly review our forecasts of commodity prices and at a cost that can be passed on to customers. In particular, we customer demand and during 2009 we specifically focused on offer a number of fixed-price products, which are fully hedged improving our internal forecasting processes. at the start of the contract. These products are competitive Upstream transactions are carefully evaluated prior to acquisition when prices increase but when prices fall we experience and are expected to meet accepted financial criteria over the life customer losses, and therefore can be exposed to surplus of the project and are approved by the Board. The purchase of commodity positions. the stake in British Energy and the acquisition of Venture are Significant longer-term price increases or decreases may require examples of how we may secure a proportion of our customers’ us to change the price at which we sell to our customers on expected energy requirements. variable tariffs. Where we do pass increased commodity prices Financial Statements

New technologies

Description: The emergence of new technologies in the form certain of immediately recovering the upfront cost of replacing of smart meters, smart grids and other new services create existing meters. threats to the Group as well as new opportunities. Mitigation: We continue actively engaging in the industry The Government has announced that every home will have a discussion on the data model, together with the Energy Retail smart meter by 2020 and that the smart meter roll-out should Association. We are also developing potential collaboration Shareholder Information be supplier-led. models with third parties. The benefits include energy savings for the customer, time-of- Although these new technologies could represent a threat to the use pricing for electricity, and better industry processes. The current business model, they could also represent a substantial installation project is complex however and the full costs are opportunity from servicing, appliance and home automation uncertain and not yet fully quantified. sales and customised tariff pricing. In particular, the introduction of smart meters potentially represents a significant opportunity Impact: Until the data management framework for smart for British Gas. meters is decided during 2010 there is a risk that individual customer consumption data could be accessible to companies We are well positioned to capitalise on these opportunities other than energy suppliers. This would constitute a risk to our and are actively building capabilities and businesses to do so. ambitions in providing energy efficiency advice and other In North America, as we build the integrated business we will services. look to capitalise on opportunities around new technologies With regard to the introduction of smart meters, we are not yet and energy efficiency.

Centrica plc Annual Report and Accounts 2009 31 Business Principal Risks and Review Uncertainties continued

Business specific factors

Health, safety and environment

Description: There are significant health, safety and embedded in our operational practices and undertaken by environment (HS&E) hazards associated with our operations, appropriately qualified trained professionals. and our vision is to put safety, health and wellbeing at the heart The Board is responsible for ensuring that the Group has the of all that we do to minimise the associated risks. We are also appropriate culture and arrangements for meeting its HS&E committed to understanding, managing and reducing the responsibilities, and the Chief Executive is accountable to the environmental and ecological impacts of our activities through Board for delivery. Our risk management and governance innovation, technology and cultural change. processes meet internationally recognised standards and There are four principal health, safety and environment risks: quarterly HS&E performance reports are submitted to the Board, specifically including process safety. • a major incident in the operation of our onshore and offshore gas production, exploration, gas storage and power generation Regarding British Energy, as a joint venture partner we have assets (including our share of British Energy); access to all information produced by EDF in support of board • an incident that results in a fatality or major injury to a member governance and oversight for both the existing operations and of the public; new nuclear projects. The Group actively reviews this information, • an intolerable number of employee injuries or an employee much of which pertains to HS&E issues, to ensure we play an fatality; and active role through our representation at board level. Additionally, • a major incident that results in significant environmental damage. we have established communication links, which allow us to highlight issues and concerns directly with those responsible. Impact: An incident related to any of the principal risks could However, ultimate responsibility for the safe operation of the result in widespread distress and harm, damage to the businesses remains with EDF. environment, significant disruption to operations and damage to our reputation. While we have continued to target HS&E risk reduction in all our operations through local plans, many of which have been Actual incidents, precautionary closures of plant or a suspension externally recognised, during 2009 we launched our new Group of activities on HS&E grounds may lead to loss of production or HS&E strategy, which includes a comprehensive governance service and impact our profits. framework, a reinforced HS&E policy and management system In turn resultant legal action could have a material financial and a programme to strengthen our HS&E leadership behaviours. impact on the Group. These will be reviewed by independent third-party consultants. Mitigation: The operations of activities involving such risks The Group has an established, senior, cross-business HS&E are heavily regulated and strict control regimes are in place Committee to help steer this improvement strategy. throughout the Group. Managing HS&E risks is deeply

Managing our reputation with key stakeholders

Description: As a diverse Group of businesses we have a Mitigation: We have a clearly defined set of business number of different stakeholders including customers, investors, principles, which apply to all employees and business partners. employees, the media, Government and regulatory bodies. These business principles (listed on page 3) set out our commitment to operate professionally, fairly and with integrity Maintaining a positive reputation for the Company is of vital wherever we work in the world. A combination of awareness importance to ensure the smooth operation of the existing training and targeted controls (including fraud and data business and protect profitability. protection) is in place to encourage and monitor adherence Customers expect high service levels and a positive consumer to our business principles. experience from Britain’s leading brands. As one of these In addition, we carefully monitor customer service throughout leaders, we are expected to – and want to – exceed the norm our retail operations, and continued focus in this area has in our CR activities; similarly we have a high media profile and resulted in service improvements and fewer customer are major contributors to policy debates in Government. complaints. It is equally important to actively manage the Group’s reputation We are constantly developing products and services to meet with our other stakeholders including opinion-formers in the the needs of our customers, as demonstrated by the launch Government, the media and trade union bodies. of ‘EnergySmart’ and our ‘We’re Listening’ campaign. Impact: Consistently delivering high service levels is vital to We actively monitor reputation management on a quarterly building trust and therefore retaining and increasing the basis in the Executive Committee meetings. We also regularly customer base. Failure to do so would damage our brand, meet with opinion-formers across the political spectrum and lead to customer losses and impact the Group’s revenues. in the media and with the representatives of our major trade Failure to maintain our reputation with key stakeholders could union bodies. lead to more direct intervention by Government or the regulator in the Group’s business or industrial action by our workforce.

32 Group pensions deficit Review – Business Report Directors’

Description: The Group maintains a variety of pension In the current business environment with volatile bond and schemes including defined benefit schemes. The pension fund equity markets there is an increased risk that large deficits may liabilities are partially matched with a portfolio of assets leaving arise on our pension schemes. potential risk around changes in inflation and interest rates, Actions by the pension regulators or the trustees and/or material mortality rates and returns on assets. revisions to existing pension legislation could require increased Impact: The schemes contain a high proportion of equity contributions by the Group to the pension fund. assets as part of a strategy to provide a better return in the long Mitigation: The risks associated with the pension schemes term than alternative investments such as bonds. However, in are regularly reviewed and, in combination with expert external the short term, the difference between the IAS 19 value of advice, action is taken where necessary. liabilities and the fair value of the assets may vary significantly (eg due to a change in the discount rate used), potentially The formal triennial valuations for the main schemes at 31 March resulting in a larger deficit. 2009 were recently completed. Additional contributions have been agreed with the trustees including £200 million which was

In addition, the triennial actuarial valuations of the schemes – Governance Report Directors’ paid in 2009. A similar amount will be paid in 2010 and around may result in higher deficits than have been recognised on the £100 million will be paid in 2011. Group’s Balance Sheet (because more prudent assumptions may be used than in IAS 19) which may require the Group to make increased contributions to the pension fund.

Build an integrated North American business

Description: The North American business had a difficult Impact: If we do not achieve our strategy to integrate and grow year and was impacted by pervading low wholesale commodity the North American business further this could negatively impact prices and one-off factors, however it remains well placed the Group’s growth plans. for future growth as we look to build a more integrated Mitigation: Direct Energy, now under new management with business model.

Board representation, has completed a comprehensive review Financial Statements We continue to see significant growth potential for our North of the business. American business, and will consider opportunities upstream The new management team will focus on improving our returns and downstream to build on our integrated energy model. from the existing business and delivering the strategy to increase Further developing the integrated energy model reduces our integration. exposure to commodity prices and earnings volatility, and Our objective is for Direct Energy to deliver an increasingly we aim to achieve a leading position in our chosen markets material contribution to Group earnings over the medium term, over time. diversifying our geographic earnings profile. Shareholder Information Deliver value from our growing upstream investments

Description: The acquisition of Venture is fundamental to our We now need to ensure the successful working of the newly ongoing strategy, establishing us as the leading consolidator and integrated business and deliver incremental value from the operator of mature and orphaned gas and oil assets in the UK combined business. continental shelf. The integration of Venture with our existing Impact: If we fail to deliver the successful working of the newly business now provides us with a sustainable and flexible integrated business, this could lead to us not achieving the portfolio of assets with valuable development opportunities strategic objectives and benefits of the combined business and going forward. also lead to a failure to deliver an appropriate rate of return on Our UK upstream gas and oil headquarters are now located our investment. in Aberdeen and the business is structured around five core Mitigation: The initial phase of the integration of Venture has regions in order to maximise our focus on asset and been completed. infrastructure performance, regional geology and business development opportunities. We are pleased to have retained A new leadership structure has been implemented and the the majority of the highly skilled Venture team who will help ongoing performance of the combined business will be regularly deliver the new strategic direction of the business. reviewed by senior management.

Centrica plc Annual Report and Accounts 2009 33 Business Principal Risks and Review Uncertainties continued

IS security and business continuity

Description: Effective and secure information systems are Mitigation: There are a number of controls in place to manage essential for the efficient management and accurate billing of this risk including network segregation, monitoring, access our customers, effective power generation and successful restrictions on storage systems, regular third-party security energy trading and hedging activities. reviews and vulnerability assessments of infrastructure and applications. In addition, there is a dedicated Group IS risk team The confidentiality, integrity and availability of our information tasked with monitoring and reviewing the adherence across the systems could be affected by factors that include human error, Group to the IS risk policy. ineffective design or operation of key controls or through malfunction or deliberate attack. Business continuity plans are in place to help recover from significant outages or interruptions. To improve efficiency, we Impact: Any compromise of the confidentiality of customer continue to invest in our systems supported by strong project information could impact our reputation with current and management to minimise the associated implementation risk. potential customers and could result in legal action against the Group. Outages and interruptions could affect our ability to conduct day-to-day operations and cause us to suffer a financial loss.

Outsourcing and offshoring

Description: We have outsourced several activities, including Impact: The failure of our outsourcing partners to deliver business-critical information technology services and back office the appropriate level of service to the Group could have a and processing functions, which support our businesses in the detrimental impact on our costs, our reputation, our levels UK and North America. Some of the Group’s outsourcing of customer service and consequently negatively impact the contracts are in offshore locations in India and South Africa. Group’s revenues and profits. In addition, a number of our North Sea assets are reliant on Mitigation: New outsourcing and offshoring initiatives are third-party infrastructure (ie pipelines and platforms). challenged and reviewed by senior management in business performance reviews. We have robust project governance There is a risk that the Group’s outsourcing initiatives do not policies for all new and existing outsourcing and offshoring deliver the projected benefits as a result of: initiatives. • loss of service or inadequate service from the offshore service We have business contingency plans in place in the event provider; of terrorist or social/political events in offshore locations. • insufficient skilled resources at the outsourcer to effectively In addition, in light of the global economic downturn we manage the relationship; have performed a review of the financial health of our key • inadequate levels of retained knowledge to drive process outsourcing partners. improvements; or • risk to the Group’s employees as a result of terrorist, and/or In our upstream business, we are undertaking a number of social or political events in offshore locations. initiatives to mitigate the issues we have experienced with third-party infrastructure providers. As with any contractual relationship, there are inherent risks to be mitigated, and these are actively managed on a day-to-day basis by business unit management.

34 35 Directors’ Report – Governance Review – Business Report Directors’ 36 Board of Directors and Executive Team 38 Corporate Governance Report 44 Other Statutory Information 45 Remuneration Report 45 Letter to shareholders 46 Introduction to the Report 46 The Remuneration Committee 47 Executive Directors’ remuneration policy and framework Directors’ Report – Governance Report Directors’ 48 The total remuneration package 52 Non-Executive Directors 53 Statutory disclosures 53 Directors’ emoluments 54 Directors’ interests in shares 55 DMSS allocations 56 LTIS and SLTIS allocations 56 TSR performance graphs 56 Directors’ minimum shareholding policy 57 Directors’ interests in share options 58 Directors’ pensions 60 Independent Auditors’ Report – Group Financial Statements Shareholder Information

Centrica plc Annual Report and Accounts 2009 35 Governance Board of Directors and Executive Team

1 2 3 4

5 6 7 8

1. Roger Carr 4. Phil Bentley Chairman (63) N,R Managing Director, British Gas (51) C,E Roger Carr joined the Board as a Non-Executive Director in 2001. Phil Bentley joined Centrica as Group Finance Director in 2000, He was appointed Chairman of the Board in May 2004 and is a position he held until the end of February 2007 when he was Chairman of the Nominations Committee. He is chairman of Cadbury appointed Managing Director, British Gas. He was also Managing plc and is due to stand down from this position at a date to be Director, Europe between July 2004 and September 2006. Formerly, determined. He is a non-executive director of the Bank of England he was finance director of UDV Guinness from 1999 and group and until June 2008 was chairman of Mitchells & Butlers plc. treasurer and director of risk management of Diageo plc from 1997. Previously, he spent 15 years with BP plc in various international oil 2. Sam Laidlaw and gas exploration roles. He is also a non-executive director and Chief Executive (54) C,D,E,N the chairman of the audit committee of Kingfisher plc and he will Sam Laidlaw joined Centrica as Chief Executive in July 2006. retire from these positions in March 2010. He is Chairman of the Executive Committee and the Disclosure Committee. He was previously executive vice president of the 5. Mary Francis CBE Chevron Corporation, chief executive officer at Enterprise Oil and Senior Independent Director (61) A,C,N,R president and chief operating officer at Amerada Hess. In January Mary Francis joined the Board in June 2004 and is Senior 2008, he was appointed a non-executive director of HSBC Holdings Independent Director and Chairman of the Corporate Responsibility plc. Until August 2007, he was a non-executive director of Hanson Committee. She is a non-executive director of Aviva plc and Cable & plc. He is a trustee of the medical charity RAFT. Wireless plc, a trustee and treasurer of the Almeida Theatre and chair of governors of James Allen’s Girls’ School. She is a former director 3. Helen Alexander CBE general of the Association of British Insurers, a former non-executive Non-Executive Director (53) A,N,R director of the Bank of England, Alliance & Leicester plc and Helen Alexander joined the Board in January 2003 and is Chairman St. Modwen Properties plc, and was a senior civil servant in of the Remuneration Committee. She is president of the CBI, the Treasury and the Prime Minister’s Office. chairman of Incisive Media and the Port of London Authority, a senior adviser of Bain Capital and a non-executive director of Rolls-Royce 6. Mark Hanafin plc. She is senior trustee of the Tate Gallery and an honorary fellow Managing Director, Centrica Energy (50) E of Hertford College, Oxford. Until July 2008, she was chief executive Mark Hanafin joined Centrica as Managing Director, Centrica Energy of the Economist Group. in July 2008. He was appointed as a non-executive director of Lake Acquisitions Limited (the parent company of British Energy) and as non-executive director of British Energy Group plc in November 2009. Previously he spent 21 years with Royal Dutch Shell, most recently as CEO of Shell Energy North America in Houston. Prior to joining Shell, Mark worked for General Electric Company (GEC) having qualified as a chartered engineer.

36 Key to membership of committees Review – Business Report Directors’ A – Audit Committee C – Corporate Responsibility Committee D – Disclosure Committee E – Executive Committee N – Nominations Committee R – Remuneration Committee 9 10 Directors’ Report – Governance Report Directors’

11 12 13

7. Nick Luff 10. Chris Weston Group Finance Director (42) D,E Managing Director, North America (46) C,E Nick Luff joined Centrica as Group Finance Director in March 2007 Chris Weston was appointed to the Board in July 2009. He was

and was appointed as a non-executive director of Lake Acquisitions Managing Director, British Gas Services from June 2005. Prior to Financial Statements Limited (the parent company of British Energy) in November 2009. this, he was Managing Director, British Gas Business from January He was previously chief financial officer of The Peninsular & Oriental 2002, having joined Centrica in November 2001 following the Steam Navigation Company (P&O) and has held a number of other acquisition of One Tel where he was the managing director of Europe. senior financial roles at P&O, having qualified as a chartered Previously, he spent seven years in the army with the Royal Artillery. accountant at KPMG. He is a non-executive director of QinetiQ Group plc. Executive Team 8. Andrew Mackenzie Non-Executive Director (53) A,C,N,R 11. Grant Dawson General Counsel & Company Secretary (50) D,E Andrew Mackenzie joined the Board in September 2005. In Shareholder Information November 2007, he was appointed group executive and chief Grant Dawson has been General Counsel & Company Secretary of executive Non Ferrous at BHP Billiton, a position he took up in Centrica since the demerger from British Gas plc in February 1997, November 2008. From 2004, he was with Rio Tinto, latterly as chief having joined British Gas in October 1996. executive Diamonds and Minerals. Previously, he spent 22 years with 12. Catherine May BP plc in a range of senior technical and engineering positions and Group Director, Corporate Affairs (45) C,E ultimately as group vice president, BP Petrochemicals. From 2005 Catherine May joined Centrica as Group Director, Corporate Affairs in to 2007, he was chairman of the board of trustees of the think tank, September 2006, having previously been group director of corporate Demos, and he remained a trustee until June 2008. relations for Reed Elsevier. 9. Paul Rayner 13. Anne Minto OBE Non-Executive Director (55) A,N,R Group Director, Human Resources (56) E Paul Rayner joined the Board in September 2004 and is Chairman Anne Minto was appointed Group Director, Human Resources of the Audit Committee. In July 2008, he was also appointed as a in October 2002. Prior to that she was director, human resources non-executive director of Qantas Airways Limited and in September for Smiths Group plc, a position which she held since early 1998. 2008, he was appointed as a non-executive director of Boral Limited. She is also Chairman of the Centrica Pension Schemes. He was finance director of British American Tobacco plc from 2002 until April 2008. In 1991 he joined Rothmans Holdings Limited in Australia, holding senior executive appointments, and became chief operating officer of British American Tobacco Australasia Limited in September 1999.

Centrica plc Annual Report and Accounts 2009 37 Governance Corporate Governance Report

The Board believes that good corporate 2009 Board and committee meetings attendance Corporate governance contributes to improved Company Audit Remuneration Nominations Responsibility performance by ensuring that there is a Board Committee Committee Committee Committee clearly defined framework of roles, Number of responsibilities and delegated duties. These meetings 14 4 6 3 4 Roger Carr 14 6 3 support the Board’s aim to deliver stability Sam Laidlaw 14 3 4 and growth for the benefit of customers, Phil Bentley 14 4 employees and shareholders. Mark Hanafin 14 Nick Luff 14 This report explains how the Board applied Chris Weston(i) 5 2 the principles of the Combined Code on Helen Alexander 13 4 6 3 Corporate Governance during 2009. Mary Francis 13 3 4 2 4 Andrew Mackenzie 14 4 6 3 4

Paul Rayner 13 4 6 3 Board of Directors Paul Walsh(ii) 51 1 1

The Directors consider that the Board leads and controls the (i) Chris Weston was appointed to the Board in July 2009. Group effectively. The powers of the Directors are set out in the (ii) Paul Walsh retired from the Board in May 2009. Company’s Articles of Association (Articles), which are available on the Company’s website. The Articles may be amended by special Board meetings resolution. The Directors also have responsibilities and duties The Board recognises the importance of holding regular scheduled under other legislation and in particular the Companies Act 2006. meetings throughout the year as a key part of the governance To accommodate the final changes in respect of the Companies framework. Unscheduled supplementary meetings also took place Act 2006, the Company is proposing further changes to the during the year when necessary. During the year, the Board had Articles at the 2010 Annual General Meeting (AGM), which are eight scheduled meetings and six unscheduled supplementary further explained in the Notice of the AGM. meetings. A committee of the Board was set up to consider the All listed companies are subject to the revised version of the technical aspects of the acquisition of Venture Production plc and Combined Code on Corporate Governance (the Code), which the 20% investment in British Energy, which met on a total of five came into effect for accounting periods beginning on or after 29 occasions during the year. There was also one committee meeting June 2008. No changes were required in the Board’s governance of the Board during the year which considered technical formalities structure or operations in order to comply with the revised Code. in respect of the issuance of debt instruments and another The Company complied fully with the provisions of the Code committee meeting which considered the formal documentation in except for a period from July 2009, as explained on page 42. respect of pension scheme funding.

The Board has a schedule of matters specifically reserved for its The Board continuously assesses and reviews key priorities and approval, which is also available for inspection on the Company’s business issues for the Company over the short, medium and website. In particular, the Board is responsible for: longer term. As part of this process, the Board monitors the development of the Group’s strategy and each year one Board • changes in the capital structure of the Company; meeting is devoted specifically to strategy. Comprehensive papers • development of strategy and major policies; are presented to the Board which facilitates meaningful debate as • the appointment and removal of Directors and the Company to the performance and future direction of the Company. Secretary; All Directors are expected to attend all Board and relevant • reviewing management performance; committee meetings. Details of attendance by Directors at Board • interim dividend payments and recommendation of final and committee meetings during 2009 are set out in the table dividends; above. Where a Director was not in attendance in 2009, this was • approval of the annual operating plan, the financial statements due to other prior work commitments. Directors who were unable and major acquisitions and disposals; to attend specific Board or committee meetings reviewed the • the Group’s corporate responsibility arrangements including relevant briefing papers and provided their comments to the health, safety and environmental matters; Chairman of the Board or committee, as appropriate. • the Group’s corporate governance and system of internal Board constitution and appointments control; and The Board is made up of an appropriate balance of Executive • matters not in the ordinary course of business. and independent Non-Executive Directors. The roles of Chairman The Chairman and each Non-Executive Director has provided and Chief Executive are separate. This established division of assurance to the Board that they remain fully committed to their responsibility is formalised in writing and has been approved by the respective roles and can dedicate the necessary amount of time to Board. attend to the Company’s affairs. The Non-Executive Directors play a key governance role and bring an external view to the Board’s deliberations through their range of knowledge, experience and insight from other

CE7088_CentricaAR_p038-060_Governance.indd 38 8/3/10 11:49:47

sectors. As part of its annual review of corporate governance, The evaluation process followed up on the 2008 effectiveness Directors’ Report – Business Review – Business Report Directors’ the Board considered the independence of each Non-Executive review and the Board considered the progress made on the Director (other than the Chairman) against the criteria specified previously identified issues. in the Code and determined that each remained independent. During the year the Non-Executive Directors, including the The evaluation focused on the following key themes: board Chairman, met independently of management on a regular basis. composition; board expertise and knowledge; strategic oversight and delegation of powers; efficiency and effectiveness; board A formal, rigorous and transparent process is followed during support; risk management and internal control governance; the selection and subsequent appointment of new Directors to succession planning and improving board performance. the Board. This process is described in the section on the Nominations Committee on page 41. On 26 February 2009, the The evaluation process was carried out using a comprehensive Chairman announced a number of changes to the composition of questionnaire, which was considered and completed by each of the Board. Chris Weston was appointed to the Board on 1 July the Directors and the General Counsel & Company Secretary. In 2009 as an Executive Director with responsibility for the addition to this, the Senior Independent Director chaired a meeting Company’s North American business. Chris Weston will therefore of the independent Non-Executive Directors in the absence of the seek reappointment to the Board at the forthcoming AGM. Paul Chairman to appraise the Chairman’s individual performance. Walsh, who had served as a Non-Executive Director since March A consolidated report of the output from the evaluation exercise – Governance Report Directors’ 2003, retired from the Board at the conclusion of the 2009 AGM. was prepared for review and consideration by the Board. A search for a suitable replacement for Paul Walsh is ongoing. The evaluation report concluded that the Board and its committees In accordance with the Companies Act 2006, the Board continue to operate effectively. A small number of actions and considered and authorised each Director’s reported actual and improvements were identified. In particular, the Board identified the potential conflicts of interest during the year. Each Director following enhancements, which will be incorporated into the future abstained from approval of their own reported conflicts. The Board Board programme to ensure that the operation of the Board and will continue to monitor and review actual and potential conflicts of its committees continue to improve: interest on a regular basis. • greater focus on the competitive environment both in the UK and In accordance with the Code and the Articles, all Directors are in North America; subject to reappointment by shareholders at the first AGM greater awareness of potential political and regulatory following their appointment to the Board and thereafter are subject •

to reappointment every third year. Non-Executive Directors are developments; Financial Statements initially appointed for a three-year term and, subject to review and • greater visibility of corporate responsibility issues; and reappointment by shareholders, can serve up to a maximum of • further post investment reviews. three terms. Upon the recommendation of the Nominations The Chief Executive’s performance is reviewed regularly by the Committee, Phil Bentley, Roger Carr, Nick Luff and Chris Weston Chairman and the Chief Executive reviews the performance of will be proposed for reappointment at the AGM. The Code states the other Executive Directors. In addition, the Remuneration that any length of service beyond six years for a Non-Executive Committee assesses the performance of the Executive Directors Director should be subject to particularly rigorous review and in connection with its determination of senior management should take into account the need for progressive refreshing of the remuneration levels as explained in the Remuneration Report on

Board. In view of this, and following the recommendation of the Shareholder Information pages 45 to 59. Nominations Committee, Helen Alexander, who joined the Board in January 2003, will again seek reappointment at the AGM and The Board and its committees will continue to review critically annually thereafter. their procedures, effectiveness and development throughout the coming year. Full details of Directors’ service contracts, emoluments and share interests are set out in the Remuneration Report on pages Board development 45 to 59. Directors’ biographies including their Board committee membership are set out on pages 36 and 37. All new Directors appointed to the Board receive a comprehensive induction briefing tailored to meet their individual needs. Ongoing Directors’ indemnities and insurance development and training is provided to Directors at Board meetings and, where appropriate, committee meetings. During the In accordance with the Articles, the Company has granted a deed year, Directors received regular updates and presentations on of indemnity, to the extent permitted by law, to Directors and the changes and developments to the business, and to the legislative General Counsel & Company Secretary. The Company also and regulatory environments in which the Group operates. maintains directors’ and officers’ liability insurance for its Directors and Officers. In particular, the Board was briefed on the following key issues during 2009: Board evaluation The Board is aware of the importance of continually assessing its • overview of the competitive landscape; own performance in support of the leadership of the Group and • market rates for oil and gas prices; conducts a formal evaluation of its own performance and that of • health, safety and environmental developments and issues; its committees and individual Directors annually. The evaluation • customer perceptions; was prepared and carried out by the Chairman and the General • tax strategy and governance; Counsel & Company Secretary in respect of the year ended • corporate governance developments; and 31 December 2009. • smart metering and associated developments.

Centrica plc Annual Report and Accounts 2009 39

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The Directors have full access to the advice and services of the May 2009. In accordance with the Code, Paul Rayner is identified General Counsel & Company Secretary. They also have the option as having recent and relevant financial experience. The Board has to seek independent professional advice at the Company’s determined that each member of the Committee is independent expense in respect of their duties. and that the membership meets the requirements of the Code. Board committees The key function of the Audit Committee is to review the effectiveness of the Company’s financial reporting and internal The Board has delegated authority to its committees to carry out control policies together with the procedures for the identification, certain tasks as defined in each committee’s respective terms of assessment and reporting of risks. In accordance with its terms of reference. The Board reviews each committee’s terms of reference reference, the Committee is authorised by the Board to: against best practice and approves revised terms on a regular basis. The written terms of reference for the Audit, Remuneration, • monitor the integrity and audit of the Company’s financial Nominations, Corporate Responsibility, Executive and Disclosure statements and any formal announcements relating to the Committees are available on the Company’s website and hard Company’s financial performance, including a review of the copies are available upon request. significant financial reporting judgements contained within them; All of the independent Non-Executive Directors are members of the • review the Company’s internal financial controls, internal control Audit, Remuneration and Nominations Committees. The Board and risk management systems; considers that this membership structure provides a consistency of • monitor and review the effectiveness of the Company’s internal membership within each of these principal committees and avoids audit function; undue reliance on particular members. Minutes of committee • establish and oversee the Company’s relationship with meetings are made available to all Directors on a timely basis and the external auditors, including monitoring their independent the chairmen of each of the Audit, Remuneration, Nominations and status; and Corporate Responsibility Committees provide updates to the • establish and oversee appropriate whistleblowing and fraud Board at the next Board meeting. prevention arrangements within the Company. A chart setting out the Company’s Board and Executive During the year the Committee met on four occasions. At each of Committee structure is set out below. these meetings, the Committee met privately with the external Details of each committee, including membership, are set out auditors, and separately with the Head of Audit and Risk (who is in the following committee reports. responsible for internal audit). Audit Committee The Committee received regular comprehensive reports from the Head of Audit and Risk, senior management and the external The members of the Audit Committee are Paul Rayner (Chairman), auditors, PricewaterhouseCoopers LLP. The Committee also Helen Alexander, Mary Francis and Andrew Mackenzie. Paul Walsh requested clear objectives, timescale and achievement milestones was also a member up until his retirement from the Board in against which performance could be clearly measured in respect of all ongoing issues.

Governance structure

Board of Directors

Corporate Audit Remuneration Executive Nominations Disclosure Responsibility Committee Committee Committee Committee Committee Committee

Group Risk Group Financial Health, Safety Investment Management Risk Management and Environment Sub-Committee Committee Committee Committee

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The Committee considered a number of key issues during the year The Committee’s membership is comprised of a majority of Directors’ Report – Business Review – Business Report Directors’ and in particular reviewed: independent Non-Executive Directors. The primary responsibilities of the Committee are to: • considerations in respect of reporting during the difficult economic conditions throughout the year; • make appropriate recommendations to the Board for the • governance structures, in particular the links between the appointment of replacement or additional Directors; Group’s Audit Committee and Business Unit level governance • devise and consider succession planning arrangements bodies; for Directors and other senior executives; and • information technology general controls; • regularly review the structure, size and composition of the • succession planning and senior appointments within the Audit Board and make recommendations to the Board with regard and Risk functions; to any proposed changes. • review of remediation plans and lessons learned from internal In making its appointment recommendations to the Board, the control issues identified in the businesses in the Netherlands and Committee reviews the overall balance of skills, knowledge and Texas; and experience on the Board against current and future requirements • ongoing compliance with the Undertakings in respect of the Company and, as appropriate, draws up a list of required of Centrica Storage Limited and compliance reporting in general. candidate attributes. – Governance Report Directors’

The Committee members also participated in a training session The Committee met on three occasions during the year and during the year facilitated by Deloitte regarding current internal and considered the proposed appointment of Chris Weston, Managing external audit matters. Director, North America, who joined the Board in July 2009. In addition to this appointment, the Committee considered: PricewaterhouseCoopers LLP have been the external auditor of the Group since the demerger of Centrica in 1997. Under its terms • the reappointment of Directors retiring by rotation at the of reference, the Audit Committee makes recommendations 2009 AGM; through the Board to the shareholders to consider at the AGM, or • Board and senior management succession planning and in at any time during the year, on the appointment, reappointment particular the ongoing search for a replacement in respect of and removal of the external auditor. There are no contractual Paul Walsh; and obligations restricting the Group’s choice of external auditor. Accordingly, following consideration, the Audit Committee has • changes in Phil Bentley’s responsibilities, as announced in recommended to the Board that a resolution to reappoint February 2009. Financial Statements PricewaterhouseCoopers LLP be proposed at the AGM and the Corporate Responsibility Committee Board has accepted and endorsed this recommendation. The members of the Corporate Responsibility Committee are The Board has approved policies that restrict the types of non- Mary Francis (Chairman), Phil Bentley, Sam Laidlaw, Andrew audit work that can be undertaken by the external auditors and Mackenzie, Catherine May and Chris Weston. restrict the employment by the Group of former employees of the external auditors. The award of non-audit work, within categories A report detailing the work carried out by the Corporate that the external auditors are permitted to carry out under the Responsibility Committee during the year is included within the

Board-approved policies, is subject to pre-clearance by the Audit Corporate Responsibility Review on pages 21 to 26. Shareholder Information Committee if the fee exceeds specified thresholds. The Group’s policy to seek competitive tenders for all major consultancies and Executive Committee advisory projects is set out in note 13 to the Financial Statements The members of the Executive Committee are the Executive on page 97. In addition, the Committee was provided with reports Directors and those key senior managers whose biographical of all non-audit assignments awarded to the external auditors and, details are set out on pages 36 and 37. Sam Laidlaw is Chairman on a regular basis, a full breakdown of non-audit fees incurred of the Committee. during the year. The Committee is responsible for the day-to-day management In accordance with International Standards on Auditing (UK & of the Group’s operations within the limits set out in the Group’s Ireland) 260 and Ethical Statement 1 issued by the Accounting delegation of authority, which was reviewed and approved by Practices Board, and as a matter of best practice, the external the Board during the year. The Committee also has a schedule auditors have confirmed their independence as auditors of the of matters specifically reserved for its approval. Company, in a letter addressed to the Directors. The Committee has delegated certain tasks to the sub-committees Remuneration Committee below and receives regular updates from each one: A report detailing the composition, responsibilities and work • Group Risk Management Committee; carried out by the Remuneration Committee during the year, • Group Financial Risk Management Committee; including an explanation of how it applies the principles of the Health, Safety and Environment Committee; and Code in setting Executive Directors’ remuneration, is included • within the Remuneration Report on pages 45 to 59. • Investment Sub-Committee.

Nominations Committee The members of the Nominations Committee are Roger Carr (Chairman), Helen Alexander, Mary Francis, Sam Laidlaw, Andrew Mackenzie and Paul Rayner. Paul Walsh was also a member up until the time he retired from the Board in May 2009.

Centrica plc Annual Report and Accounts 2009 41

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Disclosure Committee of the board, excluding the chairman, should comprise non- executive directors determined by the board to be independent. The members of the Disclosure Committee are Sam Laidlaw As previously reported, Paul Walsh retired as a Non-Executive (Chairman), Nick Luff and Grant Dawson. Director of Centrica in May 2009 and a search for a replacement is The Committee met on a number of occasions during the year ongoing. In July 2009, Chris Weston was appointed to the Board and is responsible for implementing and monitoring systems and as Managing Director, North America to further strengthen the controls in respect of the management and disclosure of inside structure and leadership required to maximise the opportunities for information. The Committee is also responsible for ensuring that the North American business. As a result of these changes, the regulatory announcements, shareholder circulars, prospectuses membership of the Board did not meet provision A.3.2 of the Code and other documents issued by the Company comply with any for the latter half of 2009. Whilst the Board recognises the applicable legal or regulatory requirements. membership of the Board is not in line with the Code, it believes that it still has a robust governance structure and that no individual Relations with shareholders or small group of individuals dominate the Board’s decision making. A search for a replacement for Paul Walsh is ongoing and The Board recognises and values the importance of maintaining an following that appointment, the composition of the Board is effective investor relations and communication programme. The expected to be fully compliant with the Code. Board is proactive in obtaining an understanding of shareholder views on a number of key matters affecting the Group. Risk management and internal control The Chief Executive and Group Finance Director held regular The Board regards the identification and assessment of risks, meetings with the Company’s major shareholders during the year. together with the mitigating internal controls, to be fundamental to achieving the Group’s strategic objectives. It either directly or The Chairman and the Senior Independent Director attended the through its committees, sets objectives, performance targets and meetings at which the annual and interim results were presented to policies for management of key risks facing the Group. The Board major investors and analysts. The Chairman also met a number of has overall responsibility for the Group’s system of internal control major institutional shareholders during the year to gain a first-hand and risk management which is designed to manage rather than understanding of their concerns and key issues. eliminate the risk of failure to achieve the objectives and can The Company’s AGM provides all shareholders with the provide only reasonable, and not absolute, assurance against opportunity to develop further their understanding of the Company material misstatement or loss. and to ask questions of the full Board on the matters put to the Across the Group, each business has a Risk Management meeting, including the Annual Report. All Directors are invited to Committee that seeks to identify, assess and advise on the attend each AGM. At the AGM, the Chairman and the Chief management of risks. These assessments are reported to the Executive present a review of the Group’s business. A poll is Group Risk Management Committee to develop the Company’s conducted on each resolution at all Company General Meetings. overall risk profile including those risks that might affect the All shareholders also have the opportunity to cast their votes in Company at Group level. Where significant risks have been respect of proposed resolutions by proxy, either electronically or by identified, a control infrastructure has been established to ensure post. Following the AGM, the voting results for each resolution are day-to-day monitoring and management of risks. The Centrica published and are available on the Company’s website. Executive Committee reviews the risks identified by the Group Risk Mary Francis, the Senior Independent Director, is available to Management Committee at its monthly meetings to assure itself shareholders if they have concerns that contact through the that the significant risks facing the Group are being managed normal channels has either failed to resolve or is deemed appropriately. Centrica Storage Limited, which is subject to inappropriate. Undertakings given to the Secretary of State for Business Innovation & Skills, operates separately but to the same standards Formal reports of investor feedback are presented to the Board of internal control and risk management as the rest of the Group. at regular intervals. The processes of newly-acquired companies are integrated with those of the Group. Centrica’s website contains up-to-date information for shareholders and other interested parties including share price At each of its four meetings in 2009, the Audit Committee received information, news releases, speeches from the AGM, a Group Risk Report providing an assessment of the key risks presentations to the investment community and a section on facing the Company including the adequacy of the associated shareholder services. The Company’s Annual Report and Annual controls. Details of the principal risks and uncertainties are set out Review and other shareholder circulars are also published on the on pages 29 to 34 of this report. In addition, the Audit Committee website. is provided with the results of reviews conducted by the internal audit function according to a plan approved by the Committee. Compliance statement These reports, supplemented by management presentations, As the Company is listed on the London Stock Exchange, it is enable the Audit Committee to track a number of issues, monitor subject to the Code, which is available from the Financial Reporting performance against objectives and ensure that necessary actions Council (www.frc.org.uk). are taken to remedy any significant failings or weaknesses identified from those reports. The Chairman of the Audit Throughout the year ended 31 December 2009, the Company Committee reported the issues discussed and conclusions complied fully with the provisions set out in Section 1 of the Code reached at the following Board meeting. with the exception of provision A.3.2 which states that at least half

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The Centrica Controls Board, whose members are the Group

Directors’ responsibility statement Review – Business Report Directors’ Finance Director, Director of Financial Control, Head of Audit and Risk and Business Unit Finance Directors, is responsible for The Directors, who are named on pages 36 and 37, are ensuring appropriate internal controls are in place over financial responsible for preparing, in respect of each financial year, the reporting processes and the related IT systems. Its responsibilities Annual Report and Group Financial Statements. They are also are discharged through the Centrica Controls Steering Group responsible for ensuring that the Financial Statements give a true (CCSG) which met five times during 2009. and fair view and that they have been properly prepared in accordance with applicable law and International Financial The CCSG monitors the risks and associated controls over Reporting Standards (IFRS) as adopted by the European Union. financial reporting processes, including the consolidation process. The financial reporting controls are monitored and maintained The Group Financial Statements have been prepared in through the use of internal control frameworks which address accordance with the Companies Act 2006 and IFRS pursuant to key financial reporting risks, including risks arising from changes in Article 4 of the IAS Regulations. The parent company Financial the business or accounting standards. Effectiveness is assessed Statements have been prepared in accordance with the through quarterly self-certification and independent testing of Companies Act 2006 and United Kingdom Generally Accepted the controls. Accounting Practice. The Directors’ Report and the Remuneration

Report have been prepared in accordance with the Companies Act – Governance Report Directors’ The integrity of the Company’s public financial reporting is further 2006 and the UK Listing Authority Listing Rules. supported by a number of processes and steps to provide assurance over the completeness and accuracy of the content, In preparing the Financial Statements, the Directors are including: required to: select suitable accounting policies and then apply • review by members of the Executive Team; • them consistently; • verification exercises; make judgements and estimates that are reasonable • review and recommendation by the Audit Committee; and • and prudent; • review and approval by the Board. • state whether applicable accounting standards have been The Board’s review of the system of followed, subject to any material departures disclosed and internal control explained in the Financial Statements; and • prepare the Financial Statements on the going concern

A process of hierarchical self-certification has been established Financial Statements throughout the Group whereby the effectiveness of internal basis, unless it is inappropriate to presume that the Group controls and compliance with Group business principles and will continue in business. policies, are assessed. In 2009 the self-certification process was The Directors confirm that they have complied with the above completed at half year and full year ends. The results of the annual requirements in preparing the Financial Statements. The Directors process, together with the conclusions of the internal reviews by also confirm that the Directors’ Report contained within the Annual Internal Audit, inform the annual assessment performed by the Report includes a fair review of the development and performance Audit Committee. of the business and the position of the Group, together with a The Board, with the advice of the Audit Committee, has reviewed description of the principal risks and uncertainties that it faces. the effectiveness of the system of internal control, for the period Shareholder Information The Directors are responsible for keeping proper accounting from 1 January 2009 to the date of this report, and is satisfied that records that disclose with reasonable accuracy at any time the the Group complies with the Turnbull Guidance. The Board will financial position of the Company and the Group and enable continue routinely to challenge management in order to ensure that them to ensure that the Financial Statements and the Directors’ the system of internal control is constantly improving. Remuneration Report comply with the Companies Act 2006. They Going concern are also responsible for safeguarding the assets of the Company and the Group and hence for taking reasonable steps for the After making enquiries, the Board has a reasonable expectation prevention and detection of fraud and other irregularities. that the parent Company and the Group as a whole has adequate resources to continue in operational existence for the foreseeable Disclosure of information to auditors future. For this reason, the Board continues to adopt the going Each of the Directors who held office at the date of approval concern basis in preparing the Financial Statements. Further details of of this Directors’ Report confirm that: so far as they are aware, the Group’s liquidity position and going concern review are there is no relevant audit information of which the Company’s provided in note 4 of the Financial Statements on page 86. auditors are unaware; and they have taken all steps that they ought to have taken as Directors to make themselves aware of any relevant audit information and to establish that the Company’s auditors are aware of that information.

The Company has not entered into an auditor liability limitation agreement with its auditors during the year.

Centrica plc Annual Report and Accounts 2009 43

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Management Report community contributions and related activities on community support are described in the Corporate Responsibility Review on The Directors’ Report for the year can be found on pages 4 to 44. page 26. In line with Group policy, no donations were made for The management report for the year, as required by the Disclosure political purposes during the year (2008: nil). and Transparency Rules, is incorporated by reference within the Directors’ Report. Share capital Major acquisitions and disposals At the 2009 AGM, shareholders approved an increase in the Company’s authorised share capital. The Company was also Full details of acquisitions and disposals are disclosed in the authorised at the 2009 AGM to allot shares, within certain limits Business Review on pages 4 to 34 and notes 37 and 38 to the and as permitted by the Companies Act. A renewal of this authority Financial Statements on pages 139 to 145. will be proposed at the 2010 AGM. The Company’s authorised Events after the balance sheet date and issued share capital as at 31 December 2009, together with details of shares issued during the year, is set out in note 30 to the Events after the balance sheet date are disclosed in note 42 Financial Statements on pages 123 to 124. to the Financial Statements on page 149. Each ordinary share of the Company carries one vote. Further Related party transactions information on the voting and other rights of shareholders are Related party transactions are set out in note 40 to the Financial set out in the Articles of Association (the Articles) and in the Statements on page 147. explanatory notes which accompany notices of general meetings, all of which are available on the Company’s website at Creditor payment policy www.centrica.com. It is the Group’s policy to: Authority to purchase shares • agree the terms of payment in advance with the supplier; The Company was authorised at the 2009 AGM to purchase its own • ensure that suppliers are aware of the terms of payment; and shares, within certain limits and as permitted by the Articles. A renewal of • pay in accordance with contractual and other legal obligations. this authority will be proposed at the 2010 AGM. Shares repurchased may be cancelled or retained as treasury shares to accommodate The number of days’ purchases outstanding as at 31 December requirements for shares under the Group’s share incentive schemes. 2009 was 33 (2008: 37) for the Group (excluding Accord Energy No shares were purchased under this authority during 2009. Limited) and 20 (2008: 39) for the Company. Material shareholdings Essential contractual arrangements At 24 February 2010, Centrica had received notification of the The Group has contractual and other arrangements with various following material shareholdings pursuant to the Disclosure and third parties. Whilst the loss of or disruption to certain of these Transparency Rules: arrangements could temporarily affect the operations of the Group, % of share this Annual Report does not contain information about these third Ordinary shares capital Nature of holding parties as none of the arrangements with them are considered to be essential to the Group’s business. Legal & General Group 228,227,811 4.44 Direct Significant agreements – change of control Petronas 199,375,000 3.88 Direct The following are significant agreements to which the Company is party which take effect, alter or terminate upon the change of Auditors control in the Company following a takeover bid: PricewaterhouseCoopers LLP have expressed their willingness • as part of the demerger in 1997, BG Group plc (which is a to be reappointed as auditors of the Company. Upon the separately listed company and not a part of Centrica) assigned recommendation of the Audit Committee, separate resolutions to ownership of the British Gas trade marks and related logos to reappoint them as the Company’s auditors and to authorise the Centrica for use in Great Britain. BG Group plc has the right to call Directors to determine their remuneration will be proposed at the for a re-assignment of this intellectual property if control of forthcoming AGM. Centrica is acquired by a third party; and This Directors’ Report comprising pages 4 to 44 has been • in 2009, Centrica entered into certain transactions with EDF Group approved by the Board and signed on its behalf by: in relation to an investment in British Energy, an owner and operator of nuclear power stations in the UK. The transactions include rights for EDF Group and Centrica to offtake power from existing and new build British Energy nuclear power stations and to invest in new build nuclear power stations. As part of these Grant Dawson arrangements, on a change of control of Centrica, Centrica loses General Counsel & Company Secretary its rights to participate on the Boards of the companies in which it 25 February 2010 has invested and on Technical Committees for new nuclear development. Furthermore, on a change of control of Centrica, Registered office: where the acquirer is not located in a specified country, EDF Millstream Group is able to require Centrica to sell out its investments. Maidenhead Road Windsor Charitable and political donations Berkshire SL4 5GD During the year, the Group made cash charitable donations to Company registered in England and Wales No. 3033654 support the community of £4.8 million (2008: £5.9 million). Total 44

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The main changes proposed to date are described below: In 2009, the Remuneration Committee (the Review – Business Report Directors’ Committee) reviewed the remuneration Rebalancing short-term incentives arrangements for Executive Directors. The Recognising the continued importance of meeting our Health, proposed changes for 2010 are summarised in Safety and Environmental (HS&E) objectives, in 2010 each Executive Director will have an element of their Annual Incentive the letter to shareholders shown on this page. Scheme determined by the achievement of HS&E objectives.

As a result of the introduction of HS&E objectives, the bonus opportunity for on target performance will remain unchanged at Letter to shareholders 90% of base salary for the Chief Executive and 75% for the other On behalf of the Board, I am pleased to present the Committee’s Executive Directors. Report on Remuneration for 2009 for which we will be seeking Performance measurement approval from shareholders at our Annual General Meeting in The measurement of Total Shareholder Return (TSR) under the May 2010. Long Term Incentive Scheme will be amended going forward so that the Group’s TSR will be measured as a percentage of out-

Remuneration principles – Governance Report Directors’ In considering remuneration for our senior executives the performance of the FTSE 100 index. To provide greater simplicity Remuneration Committee has developed the following framework and transparency in the measurement process, companies which of principles. This has also formed the basis for the review of have been de-listed from the London Stock Exchange will be remuneration which began in 2009 and will continue in 2010. removed from the comparator group in future.

• Incentives will reinforce key business objectives, promote an Giving greater flexibility for tax planning ownership culture, and align executive and shareholder interests. In order to provide employees with greater flexibility, from 2010 • Senior executive remuneration levels will be benchmarked and awards made under the Long Term Incentive Scheme, and structured to ensure Centrica’s total remuneration levels (i.e. matching awards made under the Deferred and Matching Share including all fixed and variable pay components) are competitive. Scheme, will be structured as nil-cost options. This change in • The Committee will take into account market practice, best structure will not affect any other conditions or the total value of practice and best fit for Centrica when determining the awards made. appropriate structure of pay. Managing the balance of amount and risk • A significant proportion of senior executive remuneration will be The economic crisis emphasised the need to ensure that the Financial Statements delivered through long-term share-based pay. potential amount of remuneration and the stretch of performance • Incentive structures will be simple, transparent and robust, and targets do not encourage excessive risk-taking. We are satisfied structured to avoid encouraging excessive risk-taking. that our proposed structure does not do this. • Annual and long-term incentives will be based on Group, Business Unit and individual performance. Measures will include Aligning pay with the relevant market benchmark leading indicators of sustainable performance with health, safety We will continue to benchmark the remuneration of our senior and environmental objectives. executives against a UK cross-industry comparator group. We • Incentive targets may be adjusted at the discretion of the will also take into account international comparators within

Committee to take account of ‘non-performance items’ outside our industry. Shareholder Information management control that would otherwise distort the measurement of management performance. Board membership Chris Weston was promoted to the Board as an Executive Director Background and principles for proposed changes midway through 2009 and this Report describes his remuneration The Committee commenced a review of senior executive arrangements in detail for the first time. Paul Walsh was a member remuneration arrangements during 2009, to ensure that our of the Committee until he retired from the Board at the Annual remuneration principles continue to support the business. The General Meeting on 11 May 2009. We thank Paul for his valuable review will continue in 2010 and any significant changes will be contribution to the Committee’s work during recent years. discussed with shareholders. The Committee believes that the proposed changes represent a step forward in supporting the future direction of the business, are aligned to our values and are in the best interests of shareholders.

Helen Alexander Chairman of the Remuneration Committee 25 February 2010

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Introduction to the Report Key matters considered by the Committee during 2009 This Report details the Company’s executive remuneration policy and includes information on the remuneration of the Directors for Meeting Agenda itepm the financial year ended 31 December 2009. February Review of the level of base salaries for 2009 The Report will be presented to the forthcoming Annual General Consideration and approval of the outcome of Meeting (AGM) for approval. It explains how the Company has the Annual Incentive Scheme (AIS) for 2008 applied the principles of the Combined Code on Corporate Approval of change in methodology for Governance (the Code) that relate to Directors’ remuneration measuring performance conditions in respect of during the year. No Director is involved in the determination of, share awards under Deferred and Matching or votes on, any matter relating to his or her own remuneration. Share Scheme (DMSS) The Remuneration Committee Setting award levels and performance targets The role of the Committee for the AIS for 2009 The Committee is a committee of the Board and its terms of Approval of the 2008 Remuneration Report reference are available from the General Counsel & Company Secretary and are also published on the Company’s website Review of the performance test of outstanding www.centrica.com. Executive Share Options (ESOS) that were due to vest The principal role of the Committee is to determine and make Approval of Chris Weston’s terms of recommendations to the Board on the Company’s framework appointment as an Executive Director and broad policy for the remuneration of the Chairman of the Board, the Company’s Executive Directors and other senior Approval of Phil Bentley’s revised terms of executives, and the associated costs. appointment as Managing Director of the restructured British Gas business Members of the Committee during 2009 April Review of performance tests of subsisting Long Throughout 2009 Helen Alexander was Chairman of the Term Incentive Scheme (LTIS) awards Committee and Roger Carr, Mary Francis, Andrew Mackenzie and Paul Rayner were members of the Committee. Paul Walsh was a Allocation of LTIS awards for 2009 member of the Committee until he retired from the Board at the September Initial work on the review of remuneration for AGM on 11 May 2009. The Board has determined that each of 2010 and future years the Non-Executive Directors who are members of the Committee is independent. A review of the proposed approach to the 2009 Remuneration Report Advice provided to the Committee During 2009, the Committee had access to the advice and Review of performance tests of subsisting views of: LTIS awards Approval of a further allocation of LTIS awards the Group Director, Human Resources; • for 2009 • the Group Director, Reward; • the Chief Executive; Consideration of the Walker review • the Head of Audit and Risk; November Initial consideration of proposed changes to • the General Counsel & Company Secretary; remuneration policies arising from the • Kepler Associates (Kepler) who acted as independent external remuneration review adviser to the Committee; and December Comment upon, and noting of, the Executive • Towers Watson who were consulted but not formally appointed (two meetings) Directors’ draft AIS objectives for 2010 as advisers to the Committee. Consideration of, and comment upon, Neither Kepler nor Towers Watson provided any other advice to strategies for ensuring executive retention the Company.

The Committee’s activities during 2009 The Committee under its terms of reference usually meets at least four times a year. In 2009 the Committee met six times and some of the key items which were considered are described in the table opposite.

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Remuneration mix

Executive Directors’ remuneration policy Review – Business Report Directors’ and framework In 2009, the total remuneration package of the Executive Directors comprised elements in the following proportions: How reward is aligned to our strategy The Committee believes alignment between Centrica’s business Relative proportions of the components of each Executive strategy and the remuneration of its Executive Directors and senior Director’s remuneration (%) in 2009

executives to be essential. % 0 20 40 60 80 100

• The fixed elements of our remuneration packages are Ex ecutive Directors competitive, but not excessive, against the markets in which we compete for talent. This avoids building unnecessary current and Phil Bentley future costs into the business. Mark Hanaﬁn • A significant proportion of the total remuneration opportunity Sa m Laidlaw depends upon delivering business performance. Total remuneration will increase with strong performance and go Nic k Luff down if the business performs poorly. Chris Weston • Short-term incentives are focused on the delivery of strategically – Governance Report Directors’

aligned performance measures, determined on a role-by-role Salary Bonus Beneﬁts and DMSS & LTIS Pension Cash payments in basis. These include demanding financial and business-related other cash lieu of pension No te: Salary and beneﬁts are the actual amounts received during 2009, in the case of Chris Weston from 1 July 2009, objectives. th e date of his appointment to the Board. • Longer-term incentives reward the creation of shareholder value Shareholding guidelines over a three-year period. Performance is measured using a A minimum shareholding policy requires the retention of a value of combination of earnings per share (EPS) growth, relative Total shares as follows: Shareholder Return (TSR) performance and Group Economic Profit (EP). • Chief Executive – 2 times his base salary; • other Executive Directors – 1.25 times their base salary; and Remuneration policy • executives immediately below Board level – 1 times their The remuneration policy aims to deliver a remuneration package: base salary. • that will attract and retain Executive Directors and other senior The level of achievement measured against this requirement for

executives in a challenging business environment that is Financial Statements Executive Directors is set out in the table on page 56. competitive in both commercial and human resource terms; • that delivers an appropriate balance between fixed and variable Pension and other benefits compensation for each executive; Executive Directors, with the exception of Phil Bentley and Chris • in which a significant proportion depends on the attainment of Weston, are entitled under the terms of their contracts of demanding performance objectives, both short and long term; employment to receive a salary supplement in lieu of pension • that provides a strong alignment with the achievement of provision. The salary supplements are paid in cash, with the strategic objectives and the delivery of value to shareholders; and exception of part of the supplement for Sam Laidlaw which is paid • that seeks to avoid creating excessive risks in the achievement directly into his personal pension plan. The cash amounts paid in of performance targets. the year are disclosed within the Directors’ emoluments table and Shareholder Information related footnotes on page 53. Remuneration framework The remuneration framework reflects current best practice, Phil Bentley and Chris Weston participate in the Centrica Pension including the provisions on the design of performance related Plan (CPP) (a contributory final salary arrangement) and in the remuneration as set out in Schedule A to the Code, while meeting Centrica Unapproved Pension Scheme (CUPS). Full disclosure of the Group’s particular business needs: the pension arrangements for the Executive Directors is given on pages 51, 58 and 59. • the Committee reviews the packages and varies individual elements when appropriate from year to year; Emoluments of senior executives below Board level • in agreeing the level of base salaries and the performance- The total emoluments of the five senior executives immediately related elements of the remuneration package, the Committee below Board level during 2009, calculated on the same basis as considers the potential maximum remuneration that executives the emoluments of the Executive Directors detailed on page 53, fell could receive; into the following bands: • the AIS is designed to incentivise and reward the achievement of demanding financial and business-related objectives; and Bands £000 Number of senior executives • long-term share-based incentives are designed to align the 600 – 699 2 interests of Executive Directors and other senior executives 500 – 599 1 with the longer-term interests of Centrica’s shareholders 400 – 499 2 by rewarding them for delivering sustained, increased shareholder value. The Committee takes into consideration the remuneration arrangements for the wider employee population in making its decisions on remuneration for senior executives.

Centrica plc Annual Report and Accounts 2009 47

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The total remuneration package

Summary of remuneration elements for Executive Directors for 2009

Element Objective Performance period Performance measure Base salary Reflects the role and the sustained Not applicable Delivery against key personal (see below) value of the individual in terms of objectives skills, experience and contribution Annual Incentive The AIS provides a focus on the One year In 2009 awards were subject to the achievement of annual targets for: Scheme (AIS) delivery of the financial targets set Part of the amount (see pages 48 and 49) out in the operating plan. It rewards earned under AIS is • Group Economic Profit (EP) the achievement of strategic deferred for three years • Group/Business Unit performance priorities for the year that position and satisfied in shares • stretching personal objectives the Group well for strong future under DMSS at the end performance and also the delivery of the three-year period If overall performance against the of personal objectives Health, Safety and Environment (HS&E) scorecard had not been satisfactory, the Business Unit metric for the year would be reduced Deferred and Matching Assists with employee retention Three years Three-year growth in EP, measured Share Scheme and incentivises the creation of by comparing the EP before the start (DMSS) long-term value for shareholders of the performance period with that at (see pages 49 and 50) and delivery of sustained high the end of the performance period, performance described as ‘point-to-point’ EP growth Long Term Incentive Rewards long-term value creation Three years One half on earnings per share (EPS) Scheme (LTIS) via longer-term earnings, share price growth compared with RPI growth (see pages 50 and 51) and dividend growth One half on relative Total Shareholder Rewards the delivery of total returns Return (TSR) compared with FTSE 100 to shareholders Retirement benefits Positioned to ensure broad Not applicable Not applicable (see pages 51, 58 and 59) competitiveness with market practice

Base salary Annual Incentive Scheme (AIS) Reflects the role and the sustained value of the individual in The AIS provides a focus on the delivery of the financial targets terms of skills, experience and contribution. set out in the operating plan. It rewards the achievement of strategic priorities for the year that position the Group well for The Committee establishes a base salary for each Executive strong future performance and also the delivery of personal Director and other senior executives. Base salaries are determined objectives. by individual performance and having regard to market salary levels for similar positions in comparable companies. Base salaries Annual performance measures in 2009 are reviewed annually. The annual performance metrics used in the AIS in 2009 were designed to reward the delivery of our key strategic priorities for Changes in 2009 the year. Some examples of performance metrics used in 2009 There were no base salary increases for Executive Directors in include: EP; meeting cost reduction targets; project completion 2009 other than when a significant change in role took place. and customer satisfaction measured by third party, industry Phil Bentley received a base salary increase when his role recognised surveys. increased significantly when he took on responsibility for the UK downstream business. Chris Weston received a base salary increase when he was promoted to the Board on 1 July 2009.

Changes in 2010 It has been decided that base salary increases averaging 5% will be awarded to the Executive Directors in 2010, two of whom have assumed additional responsibilities. This maintains salaries at around median of the market and follows a year of significant delivery including the consolidation of British Gas into one business, the acquisition of Venture Production plc and the completion of the investment in British Energy.

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Performance for 2009 Directors’ Report – Business Review – Business Report Directors’ The annual bonus outcomes of the 2009 AIS were determined Primary measure Group Economic Proﬁ t by performance against each of the metrics used. Annual bonus levels ranged from 106% to 185% of target for the Executive Directors. Annual bonus awards for Executive Directors were between 79% and 165% of base salary.

Business Unit Economic Changes for 2010 P r o ﬁ t In 2010, performance against an HS&E metric will replace part of Cost reduction the Business Unit metrics as a core element of the AIS. The bonus opportunity for on target performance will remain unchanged at Project completion 90% of base salary for the Chief Executive, and 75% of base Customer satisfaction salary for the other Executive Directors. Group/Business Unit Performance against Health, Deferral of annual incentives Safety and Environment Part of an Executive Director’s AIS award is compulsorily deferred

scorecard may adjust metric and invested in DMSS (see below). 40% of any AIS award for the – Governance Report Directors’ downwards Chief Executive and 30% for Executive Directors and executives immediately below Board level will be deferred.

Deferred and Matching Share Scheme (DMSS) Assists with employee retention and incentivises the creation of long-term value for shareholders and delivery of sustained high Personal Personal objectives performance.

Compulsory deferral Part of the bonus earned under AIS for the previous year is In 2009, the primary financial measure was EP. In addition, each compulsorily deferred into Centrica shares (deferred shares). Business Unit had a number of business metrics focusing on their If these shares are held for three years the deferred shares key strategic priorities for the year: Business Unit Economic Profit, will be matched to the extent that a long-term performance

cost reduction targets, project completion and customer condition is met. Financial Statements satisfaction levels. Voluntary deferral Performance is also assessed against a corporate responsibility Executives may make an additional voluntary deferral of AIS into scorecard that includes Health, Safety and Environment (HS&E) Centrica shares (investment shares). The maximum total deferral performance indicators. If overall performance against the that may be made, including the compulsory deferral, is up to 50% corporate responsibility scorecard was not satisfactory, the overall of the maximum annual incentive opportunity which may be earned Business Unit metric results for the year would have been reduced. for a year.

A bonus will be forfeited if overall performance is deemed to be Compulsory Deferral Voluntary Deferral unsatisfactory. Part of AIS earned is Additional AIS may be Shareholder Information automatically deferred into deferred (up to 50% of the Annual incentive opportunities in 2009 At the beginning of each year, the Committee reviews the AIS Centrica shares maximum AIS opportunity, to ensure that the incentive opportunity remains competitive in including the compulsory the marketplace. For 2009, the target and maximum bonus deferral) opportunity, together with the relative proportions of the Deferred shares Investment shares components that made up the target bonus opportunity, were as follows:

Percentage bonus opportunities at target and maximum

% of base salary Target Max Performance measured Chief Executive 50 30 10 90%180% After the end of three years the growth in EP performance is measured Executive Directors 42 25 8 75%150% Executives immediately 30 22 8 60% 120% below Board level

Financial performance targets Group/business-related targets Stretching personal objectives

Shares matched If the performance target is met shares may be matched up to 2 for 1

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Performance measures attaching to the DMSS awards The performance conditions attaching to DMSS awards made for 2007 to 2009 are shown in the table below.

Vesting criteria 2009 Performance condition over three-year period Level at which shares matched depends on point-to-point • 2 for 1 match for point-to-point EP growth of 25% or more EP performance targets • Zero match for no point-to-point EP growth • Vesting of matching shares will increase on a straight-line basis between these points Vesting criteria 2007 and 2008 Level at which shares matched depends on cumulative • 2 for 1 match for cumulative EP growth of 25% or more EP performance targets • Zero match for no cumulative EP growth • Vesting of matching shares will increase on a straight-line basis between these points

Share matching DMSS awards delayed in 2009 Share matching increases on a straight-line basis from zero In 2009 the Executive Directors, and a number of senior matching for no EP growth to a maximum of 2 for 1 matching for executives, were subject to dealing restrictions under the three-year EP growth of 25% or more. Company’s Share Dealing Code. 40% of AIS payable in 2009 to the Chief Executive, and 30% for Executive Directors and For the purposes of matching, the investment shares are executives immediately below Board level, was deferred and grossed up for income tax and employees’ National Insurance automatically invested in deferred shares, in accordance with contributions. To provide a closer alignment with the interests of the normal timetable. Participants were given the opportunity to Centrica’s shareholders, the number of matching shares that are indicate if they wished to invest in investment shares and the released will be increased to reflect the dividends that would have investment took place in May 2009, once the Company had been paid during the three-year performance period on the ceased to be in a prohibited period. matching shares that vest. In order to restore participants to the position they would have In the event of a change of control the number of matching been in had the Company been able to operate the scheme shares that vest will be subject to time-apportionment in line under the normal timetable in 2009, the Committee determined with best practice. that the three-year performance period will be deemed to have For awards made from 2010 onwards it is intended that the commenced in April 2009. Deferred and investment shares will matched shares will be awarded in the form of nil-cost options. be matched with shares only to the extent that the performance condition is met (see table above). The performance condition is based on performance over three financial years and is unaffected by the delayed operation of the DMSS.

Long Term Incentive Scheme (LTIS) Rewards long-term value creation via longer term earnings, share price and dividend growth and the delivery of total returns to shareholders. Under the LTIS conditional allocations of shares up to a maximum of 200% of base salary may be made to Executive Directors and other senior executives. In 2009, LTIS allocations equal to 200% of base salary were awarded to Executive Directors and, at lower levels, to other senior executives. The performance measures attaching to the LTIS awards made for 2008 and 2009 are shown in the table below.

Vesting criteria Performance condition over three-year period

One half on EPS growth against RPI growth • If EPS growth does not exceed RPI growth by 9%, zero vesting • If EPS growth exceeds RPI growth by 9%, then 25% will vest • If EPS growth exceeds RPI growth by between 9% and 30%, then vesting will increase on a straight-line basis between 25% and 100% • Full vesting for EPS growth exceeding RPI growth by 30% EPS is the Group’s diluted adjusted earnings per share One half on TSR measured against a comparator group of the • Full vesting for upper quintile ranking FTSE 100 as constituted at the beginning of the performance • Zero vesting for sub-median ranking period • Vesting will increase on a straight-line basis between 25% and 100% for ranking between median and upper quintile

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EPS payout straight-line basis between 25% and 100% for out-performance of Directors’ Report – Business Review – Business Report Directors’ between 0.1% and 7% p.a. To provide greater simplicity and 100 transparency in the measurement process, companies which have 75 been de-listed from the London Stock Exchange will be removed 50 from the comparator group in future. 25 Payout as % % as Payout Payout as % % as Payout Executive Share Option Scheme (ESOS) of shares of awarded shares of awarded 0 No grants of options under the ESOS were made during 2009. 0 10% 20% 30% 40% 50% Details of options granted prior to 2009 and still held by Executive EPS growth in excess of RPI over three years Directors are shown on page 57. The maximum number of shares that could be transferred to each If, and to the extent that, performance conditions are satisfied, Executive Director upon satisfaction of the performance conditions options normally become exercisable three years after the date appears on page 54. of grant and remain so until the tenth anniversary of grant.

In assessing the extent to which the performance conditions have Funding of share schemes been met, the Committee uses data provided by Alithos Limited It is the Company’s current intention to satisfy the requirements of (an independent third party) for comparative TSR performance and its share schemes in a method best suited to the interests of the – Governance Report Directors’ audited results for EPS performance. The TSR graphs for the LTIS Company, either by acquiring shares in the market or, subject to awards that vested in April and September 2009 are shown on institutional guidelines, issuing new shares or using shares held in page 56. treasury. To satisfy the release of shares under the LTIS and in The Committee also reviews whether the extent to which the order to meet the requirements of the ESOS in 2009, newly issued performance conditions have been achieved is a genuine reflection shares were used. Shares were bought in the market and are held of the Company’s underlying financial performance. in trust to satisfy allocations made under the Special Long Term Incentive Scheme (SLTIS) and Special Executive Share Option TSR payout Scheme (SESOS) during 2008.

100 Retirement benefits 75 Executive Directors, with the exception of Phil Bentley and Chris 50 Weston, are entitled under the terms of their contracts of

25 employment to receive a salary supplement in lieu of pension Financial Statements Payout as % % as Payout % as Payout of shares of awarded of shares of awarded 0 provision. Mark Hanafin and Sam Laidlaw are each entitled to 40% of base salary, while Nick Luff is entitled to 30% of base salary,

Bottom 80th 70th 60th 50th 40th 30th 20th Top increasing to 40% with effect from April 2010. TSR ranking over three years The salary supplements are paid in cash, with the exception of part To the extent that the performance condition is met, the number of of the supplement for Sam Laidlaw which is paid directly into his shares that are released will be increased to reflect the dividends personal pension plan. The cash amounts paid in the year directly that would have been paid on those shares during the three-year to individuals are disclosed within the Directors’ emoluments table performance period. on page 53. Shareholder Information For LTIS awards made in 2007 the vesting criteria were largely Phil Bentley and Chris Weston continue to participate in the as above. The TSR element was unchanged. For the 50% of the Centrica Pension Plan (CPP) (a contributory final salary award for which the performance criteria was EPS growth, the arrangement), as they were employed in the Group before the performance criteria was as above for 37.5% of the award. For the plan was closed to new employees on 30 June 2003. They also remaining 12.5%, if EPS growth does not exceed RPI growth by participate in the Centrica Unapproved Pension Scheme (CUPS). 20%, there is zero vesting. If EPS growth exceeds RPI growth by Disclosure of the pension arrangements for the Executive Directors 20%, then 25% will vest. If EPS growth exceeds RPI growth by is given on pages 58 and 59. between 20% and 40%, then vesting will increase on a straight-line basis between 25% and 100%. There is full vesting for EPS growth Other employment benefits exceeding RPI growth by 40%. In common with other senior management, Executive Directors are entitled to a range of benefits, including a company car, life LTIS awards made in 2006 were subject to the same vesting assurance premiums, private medical insurance and a financial criteria and performance conditions as set out in the table on counselling scheme. During the year, Mark Hanafin and Sam page 50. Laidlaw were also provided with a driver for limited personal mileage. Nick Luff is provided with a cash allowance in lieu of a Each year, before making LTIS awards, the Committee considers company car. Such benefits are subject to financial limits as set the performance conditions attaching to them, to ensure that they out in appropriate policies. are aligned with the challenging growth and cost reduction targets inherent in the strategic plan. They are also eligible to participate in the Company’s HMRC- approved Sharesave Scheme and Share Incentive Plan, which Changes for 2010 are open to all eligible employees on the same basis, providing In respect of LTIS awards in 2010 and in subsequent years, it is a long-term savings and investment opportunity. intended that these will be structured as nil-cost options. All taxable benefits arising from employment by the Company The measurement of TSR will also be amended going forward have been included in the ‘Benefits and other cash’ column of such that the Group’s TSR will be measured as a percentage out- the table shown on page 53. performance of the FTSE 100 Index. Vesting will increase on a

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Service contracts The fees are usually reviewed every two years and were reviewed It is the Company’s policy that the notice period in Executive in June 2009. In line with our decision to award no base salary Directors’ service contracts does not exceed one year. The increases to Executive Directors in 2009 (except where individuals Executive Directors’ service contracts have no fixed term but have had a significant change to their responsibilities), no increases provide that either the Director or the Company may terminate in fees were awarded to Non-Executive Directors. The fee levels the employment by giving one year’s written notice and that will next be reviewed in 2010. the Company may pay compensation in lieu of notice. The Non-Executive Directors, including the Chairman, do not On a change of control, conditional awards under DMSS and LTIS participate in any of the Company’s share schemes, incentive will vest to the extent that the performance conditions have been plans or pension schemes. met at the vesting date and pro-rated for the time elapsed since Terms of appointment the start of each performance period, until the vesting date, Non-Executive Directors, including the Chairman, do not have subject to the overriding discretion of the Committee. service contracts. Their appointment is subject to the Articles of In the case of new external appointments to the Board, the Association and the dates they joined the Board are shown in the Committee retains a level of flexibility, as permitted by the Code, in table on page 53. Roger Carr’s letter of appointment contains a order to attract and retain suitable candidates. It therefore reserves six-month notice period. The Chairman’s fees are approved by the the right to offer contracts which contain an initial notice period in Remuneration Committee. The fees of the Non-Executive Directors excess of one year, provided that at the end of the first such are approved by the Executive Committee, whose current period the notice period reduces to one year. The Committee members are: the Executive Directors (Sam Laidlaw, Phil Bentley, exercised this discretion in respect of the appointment of Sam Mark Hanafin, Nick Luff and Chris Weston) and three other senior Laidlaw on 1 July 2006, Nick Luff on 1 March 2007 and Mark executives (Grant Dawson, Catherine May and Anne Minto) all of Hanafin on 14 July 2008. Each has a service contract that contains whose biographies are included on pages 36 and 37. a notice period of two years, which reduces to one year on the Other matters in 2009 second anniversary of their respective date of appointment. The contractual notice periods for Sam Laidlaw and Nick Luff reduced Promotion to the Board to one year in 2008 and 2009 respectively. Chris Weston was appointed to the Board on 1 July 2009. His base salary on appointment was £500,000 per annum. His AIS is External appointments of Executive Directors subject to 30% deferral and investment as deferred shares under The Board believes that experience of other companies’ practices DMSS. His opportunity to participate in LTIS increased on his and challenges is valuable both for the personal development of its appointment, in line with our policy. He received an LTIS award of Executive Directors and for the Company. 150% of base salary in April 2009 and a further LTIS award of 50% of salary in September 2009. It is therefore the Company’s policy to allow each Executive Director to accept one non-executive directorship of another Enlargement of roles company, although the Board retains the discretion to vary this Phil Bentley’s role as Managing Director, British Gas, broadened policy. Fees received in respect of external appointments are significantly in 2009 as the residential energy, services and retained by the individual Director. business energy activities were combined into a single customer- focused retail operation. In recognition of this change he received In 2009, Phil Bentley received £68,300 as a non-executive director an increase in his base salary. In addition, a commitment was of Kingfisher plc, Sam Laidlaw received £85,000 as a non- made that if he remains with the Group at least until January 2012, executive director of HSBC Holdings plc and Nick Luff received the accrued value of his pension under CPP will be increased £47,000 as a non-executive director of QinetiQ Group plc. progressively over time. Non-Executive Directors Mark Hanafin and Nick Luff assumed responsibilities for the Company’s nuclear investments in 2009. Remuneration policy for Non-Executive Directors Centrica’s policy on Non-Executive Directors’ fees takes into Other matters in 2008 account the need to attract individuals of the right calibre and Rights Issue adjustments experience, their responsibilities and time commitment and the Under the Rights Issue effective 15 December 2008, for every level of fees paid by other companies. eight existing Centrica plc shares held on 14 November 2008, Fees shareholders received the right to buy three new Centrica plc The annual fees currently payable to the Non-Executive shares at 160 pence per share. Existing conditional share awards, Directors are: including DMSS matching shares and LTIS allocations, were adjusted to reflect the dilutive effect of the Rights Issue and were Base fees multiplied by a factor of 1.1233. Chairman £450,000 The performance conditions under the LTIS, ESOS and the DMSS Non-Executive Directors £60,000 were also reviewed by the Committee and appropriate Additional fees adjustments were made to reflect the dilutive effect of the Rights Chairman of Audit Committee £18,000 Issue. Previously reported EPS was restated in accordance with Chairman of Remuneration Committee £12,000 IAS 33 and dividends per share for the six months ended 30 June 2008, and the preceding five years, were restated to take account Chairman of Corporate Responsibility Committee £12,000 of the bonus element of the Rights Issue. TSR was adjusted by a Senior Independent Director £20,000 rate of 0.8902, being the agreed Rights Issue adjustment formula determined by dividing the theoretical ex-rights price (238.36 pence) by the closing share price on the last date the shares traded cum-rights (267.75 pence). 52

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Recruitment to the Board shares other than continued employment with the Company. In the Directors’ Report – Business Review – Business Report Directors’ Mark Hanafin was appointed to the Board on 14 July 2008. event of a change of control, the number of shares that vest will not be subject to time-apportionment. A one-off allocation was made to him under the SLTIS to replace awards from his previous employer, in accordance with the terms A grant of unapproved options was also made under the SESOS of his engagement. The SLTIS rules were based on the existing to him in 2008 to replace awards from his previous employer, in LTIS rules. An allocation of shares was made to vest in two equal accordance with the terms of his engagement. The SESOS rules tranches on 28 February 2009 and 2010. The first tranche vested were based on the existing ESOS rules. However, in accordance in 2009. In accordance with the rules of the SLTIS, there are no with the rules of the SESOS, the grant is not subject to any performance conditions attaching to the remaining unvested performance conditions, is exercisable immediately and will remain so until the tenth anniversary of grant.

Statutory disclosures Audit requirements The Remuneration Report from page 45 to page 53 up to this statement has not been audited. From this point until the end of the Report on page 59, the disclosures, with the exception of the graphs on page 56, have been audited by the Company’s auditors, – Governance Report Directors’ PricewaterhouseCoopers LLP.

Directors’ emoluments

Total Total Base Annual Incentive Cash payments Benefits and emoluments emoluments salary/fees Scheme (AIS) in lieu of pension other cash 2009 2008 £000 £000 (i) £000 £000 (ii) (iii) £000 (iv) £000 (iv)

Executive Directors Date of appointment Phil Bentley 13 September 2000 608 596 − 45 1,249 1,089 Mark Hanafin (v) 14 July 2008 530 487 212 65 1,294 788 Sam Laidlaw 1 July 2006 915 908 124 64 2,011 1,730 Nick Luff 1 March 2007 560 520 168 19 1,267 1,196

Chris Weston(vi) 1 July 2009 250 139 − 200 589 − Financial Statements

Past Director Date of leaving the Board Jake Ulrich 12 May 2008 − − − − – 352 2,863 2,650 504 393 6,410 5,155

Chairman Date of appointment Roger Carr 1 January 2001 450 – – – 450 450

Non-Executive Directors Date of appointment Helen Alexander 1 January 2003 72 – – – 72 72 Mary Francis 22 June 2004 92 – – – 92 92 Shareholder Information Andrew Mackenzie 1 September 2005 60 – – – 60 60 Paul Rayner 23 September 2004 78 – – – 78 78

Past Director Date of leaving the Board Paul Walsh 11 May 2009 22 – – – 22 60 774 – – – 774 812 Total emoluments 3,637 2,650 504 393 7,184 5,967

Notes on information shown in the table (i) Of the AIS bonus agreed by the Committee in respect of Sam Laidlaw and the other Executive Directors, 60% and 70% respectively is paid in cash and is included above. 40% of the agreed bonus for Sam Laidlaw (£605,364) and 30% of the agreed bonus for each Executive Director (range between £59,445 and £255,496) is deferred automatically will be invested as deferred shares in DMSS – see pages 49 and 50. Chris Weston was appointed to the Board on 1 July 2009 and his AIS above is in respect of the period from his date of appointment, subject to the 30% deferral for investment as deferred shares, as outlined above. (ii) Benefits and other cash include a payment to Mark Hanafin and benefits and expenses for Chris Weston made in respect of relocation. (iii) Executive Directors (with the exception of Phil Bentley) received a taxable interest payment in August 2009 at the rate of 1.75% in respect of the notional interest accrued on the delayed voluntary investment element of the DMSS. The purchase of deferred shares and the conditional award of matching shares was made on 3 April 2009. The purchase of investment shares and the conditional award of matching shares was made on 26 May 2009. (iv) The following are excluded from the table above − £242,500 was paid directly by the Company in 2009 into a personal pension plan for Sam Laidlaw and is disclosed on page 51. − Pensions – see pages 58 and 59. − Share options – see page 57. The aggregate gains made by Executive Directors on the exercise of Sharesave options during 2009 was £2,004. The price of a Centrica share at the date of exercise was 257.30 pence. No Executive Director exercised executive or Sharesave share options during 2008. − LTIS and SLTIS – see pages 54 and 56. The aggregate value of shares vested to Executive Directors under LTIS and SLTIS was £2,000,486 (2008: £587,332). (v) The 2008 total emoluments figure in respect of Mark Hanafin is for the period from 14 July 2008 (being his date of appointment to the Board) to 31 December 2008. (vi) The 2009 total emoluments figure in respect of Chris Weston is for the period from 1 July 2009 (being his date of appointment to the Board) to 31 December 2009.

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Directors’ interests in shares (number of shares) The following table and the tables on pages 55, 56 and 57 show the interests of the Directors who held office at the end of the year in the ordinary shares of the Company and, for the Executive Directors who served during the year, their interests in the Company’s share schemes:

DMSS total LTIS and SLTIS total DMSS total matching LTIS and SLTIS allocations of Shareholdings Shareholdings matching shares as at total allocations shares as at as at as at 1 January shares as at 1 January 2009 of shares as at 1 January 2009 31 December 2009 or on later 31 December or on later 31 December or on later Directors as at 31 December 2009 2009 appointment (i) 2009 appointment (i) 2009 appointment (i)

Executive Directors Phil Bentley (ii) 1,279,084 1,004,410 482,190 309,992 1,310,632 1,081,655 Mark Hanafin (ii) 150,909 – 332,245 – 933,780 560,642 Sam Laidlaw (ii) 1,210,438 647,817 1,459,334 757,695 2,002,611 1,680,993 Nick Luff (ii) 509,604 368,298 774,139 417,352 1,220,397 726,679 Chris Weston (ii) 421,680 416,902 470,692 470,692 828,338 730,338

Chairman Roger Carr 26,441 26,441 – – – –

Non-Executive Directors Helen Alexander 3,465 3,465 – – – – Mary Francis 3,500 3,500 – – – – Andrew Mackenzie 28,875 28,875 – – – – Paul Rayner 26,875 6,875 – – – –

Notes on information shown in the table (i) Chris Weston was appointed to the Board on 1 July 2009. (ii) Executive Directors’ shareholdings shown above include those held in the Share Incentive Plan and the deferred and investment shares held in the DMSS. Matching shares held in the DMSS, and shares held in the LTIS and SLTIS, are provided separately in the table above and in more detail in their respective tables on pages 55 and 56.

From 1 January 2009 to 24 February 2010, none of the Directors had any interests in the securities of the Company’s subsidiary or associated undertakings.

Changes since 1 January 2010 During the period from 1 January 2010 to 24 February 2010, there were no changes to the Directors’ interests in shares apart from the shareholdings of Phil Bentley, Sam Laidlaw, Nick Luff and Chris Weston which had each increased by 134 shares and by 133 shares for Mark Hanafin in respect of shares acquired through the Share Incentive Plan.

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DMSS allocations for Executive Directors who served during the year (number of shares) Directors’ Report – Business Review – Business Report Directors’

Deferred and investment Conditional matching shares held as at Deferred and investment Deferred and investment shares held as at Conditional matching Conditional matching 1 January 2009 or on later shares acquired shares held as at 1 January 2009 or on later shares awarded during shares held as at appointment (i) during the year 31 December 2009 appointment (i) (ii) the year (ii) 31 December 2009 (ii) Phil Bentley 2007 71,334 – 71,334 204,133 – 204,133 2008 51,312 – 51,312 105,859 – 105,859 2009 − 86,099 86,099 − 172,198 172,198 122,646 86,099 208,745 309,992 172,198 482,190 Mark Hanafin 2009 − 113,519 113,519 – 332,245 332,245 Sam Laidlaw 2007 115,980 – 115,980 306,021 – 306,021 2008 182,209 – 182,209 451,674 – 451,674 2009 − 282,574 282,574 − 701,639 701,639 Directors’ Report – Governance Report Directors’ 298,189 282,574 580,763 757,695 701,639 1,459,334 Nick Luff 2007 68,904 – 68,904 190,816 – 190,816 2008 91,926 – 91,926 226,536 – 226,536 2009 − 140,352 140,352 − 356,787 356,787 160,830 140,352 301,182 417,352 356,787 774,139 Chris Weston 2007 34,192 – 34,192 70,541 – 70,541 2008 49,927 – 49,927 120,111 – 120,111 2009 109,241 – 109,241 280,040 – 280,040 193,360 – 193,360 470,692 – 470,692

Dates of allocation, prices and performance periods for outstanding DMSS awards Financial Statements

Market price at date of Market price at date of Date of allocation allocation of deferred Date of allocation allocation of investment of deferred shares shares (pence) of investment shares shares (pence) End of performance period 2007 4 Apr 07 348.53 4 Apr 07 348.53 Apr 2010 2008(iii) 13 Oct 08 255.50 13 Oct 08 255.50 Apr 2011 2009 (iv) 3 Apr 09 221.75 26 May 09 248.25 Apr 2012

Notes on information shown in the DMSS tables (i) Allocations for 2007 and 2008 were adjusted in 2008 to take account of the dilutive effect of the Rights Issue. (ii) At allocation the calculation of the conditional matching shares is made on a gross basis. For the calculation of the matching shares, investment shares are grossed up (to reflect the impact of income

Shareholder Information tax and employees’ National Insurance contributions) so that the deferred and investment shares are matched on the same basis. The number of matching shares that will be released following the satisfaction of the performance condition will be increased to reflect the dividends that would have been paid during the three-year performance period, as if they had been paid on the normal dividend payment dates. Dividends are paid on the deferred and investment shares to the participants on the normal dividend payment date. (iii) In 2008 the operation of DMSS was delayed due to the Executive Directors and other senior executives being subject to prolonged dealing restrictions under the Company’s Share Dealing Code. 20% of the AIS paid in April 2008 was deferred automatically. The investment in deferred and investment shares and the conditional award of matching shares were made on 13 October 2008, once the Company had ceased to be in a prohibited period. (iv) In 2009 40% of the AIS paid to Sam Laidlaw, and 30% for the other Executive Directors, was deferred automatically. The investment in deferred shares and the conditional award of matching shares were made on 3 April 2009. The voluntary element of the DMSS was delayed due to the Executive Directors and other senior executives being subject to dealing restrictions under the Company’s Share Dealing Code. The purchase of investment shares and the conditional award of matching shares were made on 26 May 2009, once the Company had ceased to be in a prohibited period.

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LTIS and SLTIS allocations for Executive Directors who served during the year (number of shares)

Vested during 2009 In performance period

3 April 2006 4 September 26 September 4 April 2007 3 April 2008 1 September 26 September 3 April 2009 9 September (i) (iii) 2006 (ii) (iii) 2008 (iv) (v) (v) 2008 (v) 2008 (iv) (v) 2009 (v)

Phil Bentley 317,542 – – 332,329 436,095 – – 542,208 – Mark Hanafin – – 94,130 – – 372,382 94,130 467,268 – Sam Laidlaw – 402,051 – 516,137 679,774 – – 806,700 – Nick Luff – – – 310,643 416,036 – – 493,718 – Chris Weston – – – 130,044 269,680 – – 330,614 98,000

Market price at allocation date (pence) 252.83 269.30 290.88 348.53 271.08 292.00 290.88 221.75 257.40 End of performance period 2 Apr 09 3 Sep 09 28 Feb 09 3 Apr 10 2 Apr 11 31 Aug 11 28 Feb 10 2 Apr 12 8 Sep 12 Market price at vesting date (pence) 227.50 251.90 270.50

Notes on information shown in the table (i) LTIS awards made in April 2006 were subject to EPS and TSR performance conditions. As at 31 December 2008, the Company’s EPS growth had exceeded RPI by 25.1% and as a result 82.14% of the EPS shares allocated vested. At the end of the performance period to 2 April 2009, the Company ranked 19th against the FTSE 100 comparator group as constituted at the start of the performance period and as a result 100% of the TSR shares vested. Consequently, overall 91.07% of the original allocations were released to participants on 7 April 2009. (ii) LTIS awards made in September 2006 were subject to EPS and TSR performance conditions. As at 31 December 2008, the Company’s EPS growth had exceeded RPI by 25.1% and as a result 82.14% of the EPS shares allocated vested. At the end of the performance period to 3 September 2009, the Company ranked 34th against the FTSE 100 comparator group as constituted at the start of the performance period and as a result 65% of the TSR shares vested. Consequently, overall 73.57% of the original allocations were released to participants on 9 September 2009. (iii) Additional shares were released to reflect the value of the dividends that would have been paid over the respective three-year period. The total shares released were subject to income tax at the individual’s marginal rate and employees’ National Insurance contributions (NICs) at the rate of 1%, based on the market value of the shares at the date of vesting. The income tax and NICs liability was satisfied by the sale of sufficient shares and, accordingly, the Executive Directors only received the net number of shares following the sale, which, to the extent retained, is reflected in the shareholdings as at 31 December 2009 on page 54. (iv) 188,260 shares (made in two equal tranches) were awarded to Mark Hanafin under SLTIS as part of the terms of his appointment in 2008. In accordance with the rules of the SLTIS there are no performance conditions attaching to the award other than continued employment with the Company. In the event of a change of control the number of shares that vest will not be subject to time- apportionment. The first tranche of 94,130 shares were released on 2 March 2009 and were subject to the same income tax and NICs treatment as set out in note (iii) above, with the sale of sufficient shares to satisfy the liabilities. The remaining 94,130 shares will vest on 28 February 2010. (v) At the end of each performance period the Company’s EPS and TSR performance will be assessed. If, and to the extent that the performance conditions are met, the relevant number of shares will be released to the Executive Directors, at the Trustee’s discretion, as soon as practicable thereafter.

Performance graphs – TSR performance compared with comparator group used for each LTIS award The following graphs, provided by Alithos Limited (an independent third party), shows the TSR performance of the Company and that of the relevant LTIS comparator group and relate to the 2006 LTIS allocations which vested in 2009. They have not been audited by the Company’s auditors, PricewaterhouseCoopers LLP.

Total return indices – Centrica and FTSE 100 companies Total return indices – Centrica and FTSE 100 companies at 3 April 2006 at 4 September 2006 150 150 125 125 100 100 75 75 06 07 08 09 06 07 08 09

Centrica return index FTSE 100 at 3 April 2006 return index Centrica return index FTSE 100 at 4 September 2006 return index

Source: Alithos Limited Source: Alithos Limited 3 April 2006 = 100 4 September 2006 = 100

Directors’ minimum shareholding policy As stated on page 47, the Executive Directors are required to hold shares with a value based on a multiple of their base salary. Executive Directors have a period of five years in which to achieve their minimum shareholding requirement. The table below sets out the individual requirement and level of shareholding achieved for each Executive Director as at 31 December 2009.

Minimum shareholding Base salary Value of shareholdings requirement as % of Actual shareholding Target to be achieved by £000 (i) £000 (ii) base salary as % of base salary or achieved Phil Bentley 615 3,596 125 585 Achieved Mark Hanafin 530 424 125 80 13 July 2013 Sam Laidlaw 915 3,403 200 372 Achieved Nick Luff 560 1,432 125 256 Achieved Chris Weston 500 1,185 125 237 Achieved

Notes on information shown in the table (i) The base salary used to determine whether the shareholding requirement has been achieved is an Executive Director’s annual salary as at 31 December 2009. (ii) The value of shareholdings is based on the closing price of a Centrica ordinary share of 281.10 pence on the last trading day of 2009, which was 31 December 2009.

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Directors’ interests in share options Directors’ Report – Business Review – Business Report Directors’ Full details of the options over ordinary shares in the Company held by Executive Directors who served during the year, and any movements in those options in the year, are shown below.

Options held Options Exercise price as at 1 January held as at (adjusted where 2009 or on later Options granted Options exercised Options lapsed 31 December appropriate) Date from which appointment (i) during the year during the year during the year 2009 (pence) exercisable Expiry date Phil Bentley ESOS 346,277 – – – 346,277 213.70 Jun 2004 May 2011 ESOS 409,744 – – – 409,744 200.12 Apr 2005 Apr 2012 ESOS 628,312 – – – 628,312 130.50 Mar 2006 Mar 2013 ESOS 451,426 – – – 451,426 199.36 Mar 2007 Mar 2014 ESOS 496,187 – – – 496,187 203.55 Apr 2008 Mar 2015 ESOS 417,642 – – – 417,642 253.80 Apr 2009 Apr 2016 Sharesave 3,643 – – – 3,643 259.32 Jun 2010 Nov 2010

2,753,231 – – – 2,753,231 – Governance Report Directors’ Mark Hanafin SESOS 336,012 – – – 336,012 255.94 Sep 2008 Sep 2018 Sharesave – 4,727 – – 4,727 193.54 Jun 2012 Nov 2012 336,012 4,727 – – 340,739 Sam Laidlaw Sharesave 3,643 – – – 3,643 259.32 Jun 2010 Nov 2010 Nick Luff Sharesave 7,392 – – – 7,392 227.24 Jun 2013 Nov 2013 Chris Weston ESOS 112,330 – – – 112,330 130.50 Mar 2006 Mar 2013 ESOS 120,379 – – – 120,379 199.36 Mar 2007 Mar 2014 Financial Statements ESOS 130,187 – – – 130,187 203.55 Apr 2008 Mar 2015 ESOS 267,920 – – – 267,920 253.80 Apr 2009 Apr 2016 Sharesave 4,412 – 4,412 – – 211.87 Jun 2009 Nov 2009 Sharesave 4,727 – – – 4,727 193.54 Jun 2012 Nov 2012 639,955 – 4,412 – 635,543

Notes on information shown in the table of Directors’ interests in share options (i) Executive Directors’ ESOS, SESOS and Sharesave grants and their respective option prices at the start of the year are shown as at 1 January 2009 or, in the case of Chris Weston, at 1 July 2009, his date of appointment to the Board.

Executive Share Option Scheme (ESOS) Shareholder Information • Options were granted to the Executive Directors under the terms of the ESOS on 31 May 2001, 2 April 2002, 24 March 2003, 18 March 2004, 1 April 2005 and 3 April 2006. • No options were granted in 2007, 2008 or 2009. • During 2009 the Committee considered whether the performance test had been met in respect of the grants made in 2006. Over the three-year performance period EPS growth was 25.1% in excess of RPI and the options granted in 2006 vested in full. The performance criteria have now been met in respect of all of the outstanding grants under ESOS, and the Executive Directors have a 10 year period from each date of grant during which they can exercise their options.

Special Executive Share Option Scheme (SESOS) • Options were granted to Mark Hanafin under the terms of the SESOS on 26 September 2008. In accordance with the rules of the SESOS, the grant is not subject to any performance conditions and is exercisable and will normally remain so until the tenth anniversary of the grant date.

The closing price of a Centrica ordinary share on the last trading day of 2009, which was 31 December 2009, was 281.10 pence. The range during the year was 214.75 pence (low) and 285.75 pence (high).

Centrica plc Annual Report and Accounts 2009 57

CE7088_CentricaAR_p038-060_Governance.indd 57 8/3/10 11:49:53 Governance Remuneration Report continued

Share Plan arrangements for Venture employees Following the acquisition of Venture Production plc (Venture) in 2009, employees previously employed by Venture were awarded shares under the Centrica Share Award Scheme 2007 on 1 October 2009. Such awards will vest on 1 August 2010 and in accordance with the scheme rules there are no performance conditions other than continued employment within the Group. In addition, a new Centrica Deferred Bonus Plan was introduced for the same population of Venture employees under which they are given the opportunity to defer up to 100% of their actual bonus paid for the four month period ended on 31 December 2009, and receive an award of conditional shares. Such awards would vest after two years at which time they are eligible for matching shares on a 1.5 for 1 basis, subject to continued employment within the Group. No Executive Directors participated in these arrangements.

Past Directors The Committee exercised its discretion, in accordance with the rules of the ESOS, to permit Jake Ulrich to exercise his options up to six months from the third anniversary of the date on which an option was last granted to him i.e. at any time before 3 October 2009. All of his options were exercised before this date. Under the Sharesave rules, his outstanding options were exercisable until 31 January 2009, and were exercised before this date.

Performance graph – TSR performance compared with FTSE 100 Index Total shareholder return indices – Centrica and FTSE 100 Index for the five years ended 31 December 2009

180

160

140

120

100

04 05 06 07 08 09

Centrica return index FTSE 100 return index

Source: Alithos Limited 31 December 2004 = 100

The graph above compares the Company’s TSR performance with that of the FTSE 100 Index for the five years ended 31 December 2009 as required by Schedule 8 of the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008. A rolling definition of the FTSE 100 has been used. This is not the same as the definition used for the purposes of the LTIS.

Directors’ pensions Of the five Executive Directors who served during 2009, Phil Bentley and Chris Weston are members of the Centrica Pension Plan (CPP) which was formerly known as the Centrica Management Pension Scheme (CMPS). Mark Hanafin, Sam Laidlaw and Nick Luff, who all joined the Company in recent years, are not members of any of Centrica’s pension schemes.

Centrica Pension Plan (CPP) The CPP is a funded, HMRC-registered, final salary, contributory occupational pension scheme. Its rules have the following main features:

• normal retirement at age 62; • right to an immediate, unreduced pension on leaving service after age 60 at own request with employer consent, or on leaving service at the Company’s request after age 55; • life assurance cover of four times pensionable earnings for death in service; • spouse’s pension on death in service payable at the rate of 50% of the member’s prospective pension and, on death after retirement, half of the accrued pension. Children’s pensions on death are also payable at 25% of the member’s prospective pension at normal retirement age; • members’ contributions payable at the rate of 6% of pensionable earnings. Contributions made by the Executive Directors who are also members of the Centrica Unapproved Pension Scheme (CUPS) are payable at the rate of 6% of their total pensionable earnings above the scheme earnings cap; • pension payable in the event of retirement due to ill health; • pensions in payment and in deferment guaranteed to increase in line with the increase in the RPI (a maximum of 6% applies to pension accrued after 6 April 2004); and • no discretionary practices are taken into account in calculating transfer values.

CE7088_CentricaAR_p038-060_Governance.indd 58 8/3/10 11:49:54

Centrica Unfunded Pension Scheme (CUPS) Directors’ Report – Business Review – Business Report Directors’ All registered scheme benefits are subject to HMRC guidelines. As a result of the changes introduced by Centrica following the 2004 Finance Act, benefits at 6 April 2006 from the registered scheme, the CPP, could not exceed the Lifetime Allowance (£1.75 million for the 2009/10 tax year) after taking account of retained benefits from all other sources notified to Centrica at this time. The CUPS provides any additional benefits in excess of the maximum amount that could be provided through the CPP on the members’ uncapped pensionable earnings. The benefits that arise under CUPS are treated as being subject to the same rules as apply in respect of the registered portion of members’ benefits. No individuals will receive benefits from Centrica which, when added to their retained benefits elsewhere at 6 April 2006, exceed two-thirds of their final pensionable earnings. CUPS is unfunded but the benefits are secured by a charge over certain Centrica assets. An appropriate provision in respect of the accrued value of these benefits has been made in the Company’s Balance Sheet.

Pension benefits earned by Directors in the CPP and CUPS Transfer value of Accrued Accrued Increase in Transfer Transfer Difference in increase in accrued pension as at pension as at accrued pension value as at value as at Contributions transfer value pension excluding 31 December 2009 31 December 2008 less inflation 31 December 2009 31 December 2008 paid in 2009 less contributions inflation £ £ £ £ £ £ £ £

Phil Bentley 168,800 146,000 22,800 2,246,800 1,309,300 36,480 901,020 256,000 – Governance Report Directors’

Transfer value of Accrued Accrued Increase in Transfer Transfer Contributions Difference in increase in accrued pension as at pension as at accrued pension value as at value as at paid since transfer value pension excluding 31 December 2009 30 June 2009 less inflation 31 December 2009 30 June 2009 1 July 2009 less contributions inflation £ £ £ £ £ £ £ £ Chris Weston 87,300 77,000 10,300 876,600 562,200 15,000 299,400 59,600

Notes on information shown in the table • The accrued pension is that which would be paid annually on retirement at age 62, based on eligible service to, and pensionable earnings at, 31 December 2009. The pension accrual rates for 2009 for Phil Bentley and Chris Weston were 2.65% and 2.22% of final pensionable earnings respectively. For Chris Weston the increase in the accrued pension covers the period since his appointment to the Board on 1 July 2009. • As at 31 December 2008 the accrued pension for Chris Weston as an employee of the Group was £68,700. • The figures shown for the increase in the accrued pension excludes inflation as the annual rate to 30 September 2009 was below the minimum of 0.0%. This is consistent with the rate used for pension increases for the CPP and CUPS.

This Report on remuneration has been approved by the Board of Directors and signed on its behalf by: Financial Statements

Grant Dawson General Counsel & Company Secretary 25 February 2010

Shareholder Information

Centrica plc Annual Report and Accounts 2009 59

CE7088_CentricaAR_p038-060_Governance.indd 59 8/3/10 11:49:54 Governance Independent Auditors’ Report to the members of Centrica plc

We have audited the Group Financial Statements of Centrica plc Opinion on other matters prescribed by the for the year ended 31 December 2009 which comprise the Group Companies Act 2006 Income Statement, the Group Statement of Comprehensive Income, the Group Balance Sheet, the Group Statement of In our opinion the information given in the Directors’ Report for the Changes in Equity, the Group Cash Flow Statement and the financial year for which the Group Financial Statements are related notes. The financial reporting framework that has been prepared is consistent with the Group Financial Statements. applied in their preparation is applicable law and International Matters on which we are required to report by Financial Reporting Standards (IFRSs) as adopted by the exception European Union. We have nothing to report in respect of the following: Respective responsibilities of Directors and auditors Under the Companies Act 2006 we are required to report to you if, in our opinion: As explained more fully in the Directors’ Responsibilities Statement, as set out on page 43, the Directors are responsible for • certain disclosures of Directors’ remuneration specified by law the preparation of the Group Financial Statements and for being are not made; or satisfied that they give a true and fair view. Our responsibility is to • we have not received all the information and explanations we audit the Group Financial Statements in accordance with require for our audit. applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Under the Listing Rules we are required to review: Practices Board’s Ethical Standards for Auditors. • the Directors’ statement, set out on page 43, in relation to going This report, including the opinions, has been prepared for and only concern; and for the Company’s members as a body in accordance with • the part of the Corporate Governance Statement relating to the Chapter 3 of Part 16 of the Companies Act 2006 and for no other Company’s compliance with the nine provisions of the June purpose. We do not, in giving these opinions, accept or assume 2008 Combined Code specified for our review. responsibility for any other purpose or to any other person to Other matter whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing. We have reported separately on the parent Company Financial Statements of Centrica plc for the year ended 31 December 2009 Scope of the audit of the Financial Statements and on the information in the Directors’ Remuneration Report that An audit involves obtaining evidence about the amounts and is described as having been audited. disclosures in the Financial Statements sufficient to give reasonable assurance that the Financial Statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the Group’s circumstances and have been consistently applied and adequately disclosed; the reasonableness John Maitland (Senior Statutory Auditor) of significant accounting estimates made by the Directors; and the for and on behalf of PricewaterhouseCoopers LLP overall presentation of the Financial Statements. Chartered Accountants and Statutory Auditors Opinion on Financial Statements London 25 February 2010 In our opinion the Group Financial Statements:

• give a true and fair view of the state of the Group’s affairs as at 31 December 2009 and of its profit and cash flows for the year then ended; • have been properly prepared in accordance with IFRSs as adopted by the European Union; and • have been prepared in accordance with the requirements of the Companies Act 2006 and Article 4 of the lAS Regulation.

CE7088_CentricaAR_p038-060_Governance.indd 60 8/3/10 11:49:54 61 Financial Statements Review – Business Report Directors’ 62 Group Financial Statements 68 Notes to the Financial Statements

68 General information 102 Impairment testing of goodwill 123 Called up share capital 68 Summary of significant and intangibles with indefinite 124 Accumulated other accounting policies useful lives comprehensive (loss)/income 80 Critical accounting 105 Property, plant and equipment 125 Other equity judgements and key 107 Interests in joint ventures and 126 Minority interests sources of estimation associates 127 Notes to the Group Cash Flow uncertainty 109 Inventories Statement 82 Financial risk management 110 Trade and other receivables 129 Share-based payments 87 Capital management 111 Derivative financial 136 Pensions 87 Segmental analysis instruments 139 Business combinations 93 Costs of continuing 114 Hedge accounting 143 Disposals, discontinued Directors’ Report – Governance Report Directors’ operations 115 Cash and cash equivalents operations and disposal 94 Exceptional items and certain 115 Trade and other payables groups held for sale re-measurements 116 Bank overdrafts, loans and 145 Commitments and 95 Directors and employees other borrowings contingencies 95 Net interest 117 Deferred and current 147 Related party transactions 96 Taxation corporation tax liabilities 148 Fixed-fee service and 97 Dividends and assets insurance contracts 97 Auditors’ remuneration 118 Provisions for other liabilities 149 Events after the balance 98 Earnings per ordinary share and charges sheet date 100 Goodwill 119 Fair value of financial 150 Principal undertakings 101 Other intangible assets instruments

151 Independent Auditors’ Report – Company 1 5 2 Company Balance Sheet Financial Statements 1 5 3 Notes to the Company Balance Sheet 1 5 9 Gas and Liquids Reserves 1 6 0 Five Year Record Shareholder Information

Centrica plc Annual Report and Accounts 2009 61 Financial Group Income Statements Statement

2009 2008 (restated) (i), (ii) Exceptional Exceptional Business items and certain Results for Business items and certain Results for performance re-measurements the year performance re-measurements the year Year ended 31 December Notes £m £m £m £m £m £m Continuing operations Group revenue 6 21,963 – 21,963 20,872 – 20,872 Cost of sales before exceptional items and certain re-measurements 7 (17,663) – (17,663) (16,664) – (16,664) Exceptional items 8 – (393) (393) – – – Re-measurement of energy contracts 8 – (62) (62) – (1,331) (1,331) Cost of sales 7 (17,663) (455) (18,118) (16,664) (1,331) (17,995) Gross profit 4,300 (455) 3,845 4,208 (1,331) 2,877 Operating costs before exceptional items 7 (2,496) – (2,496) (2,225) – (2,225) Exceptional items 8 – (175) (175) – – – Operating costs (2,496) (175) (2,671) (2,225) – (2,225) Share of profits in joint ventures and associates, net of interest and taxation 8, 19 10 (9) 1 9 – 9 Group operating profit 6 1,814 (639) 1,175 1,992 (1,331) 661 Interest income 10 307 – 307 658 – 658 Interest expense 10 (486) – (486) (660) – (660) Net interest expense 10 (179) – (179) (2) – (2) Profit/(loss) from continuing operations before taxation 1,635 (639) 996 1,990 (1,331) 659 Taxation on profit from continuing operations 11 (531) 185 (346) (1,026) 413 (613) Profit/(loss) from continuing operations after taxation 1,104 (454) 650 964 (918) 46 Profit/(loss) from discontinued operations 8, 38 40 (131) (91) (52) (130) (182) Gain on disposal of discontinued operations 8, 38 – 297 297 – – – Discontinued operations 38 40 166 206 (52) (130) (182) Profit/(loss) for the year 1,144 (288) 856 912 (1,048) (136) Attributable to: Equity holders of the parent 1,094 (250) 844 911 (1,048) (137) Minority interests 33 50 (38) 12 1 – 1 1,144 (288) 856 912 (1,048) (136)

Earnings/(loss) per ordinary share (i), (ii) Pence Pence From continuing and discontinued operations: Basic 14 16.5 (3.3) Diluted 14 16.4 (3.3) From continuing operations: Basic 14 12.7 1.1 Diluted 14 12.6 1.1 Interim dividend paid per ordinary share 12 3.66 3.47 Final dividend proposed per ordinary share 12 9.14 8.73

(i) Restated to capitalise borrowing costs on adoption of IAS 23 (Amendment) and to reflect the change in British Gas Services Limited’s revenue recognition policy, as explained in note 2. (ii) Restated to present the European Energy segment, with the exception of the Group’s operations in Germany, as a discontinued operation, as explained in note 38. The notes on pages 68 to 150 form part of these Financial Statements.

CE7088_CentricaAR_p062-160_Financial.indd 62 8/3/10 11:38:15 Group Statement of Comprehensive Income

2009 2008

Year ended 31 December Notes £m £m Review – Business Report Directors’ Profit/(loss) for the period 856 (136) Other comprehensive income: Gains/(losses) on revaluation of available-for-sale securities 31 11 (19) Taxation on revaluation of available-for-sale securities 31 (2) 1 9 (18) Unrealised losses on cash flow hedges 31 (253) (318) Transferred to income and expense on cash flow hedges 31 234 (30) Transferred to assets and liabilities on cash flow hedges 31 (4) 1 Recycling of foreign exchange gains on cash flow hedges on disposal of business 31 10 – Exchange differences on cash flow hedges 31 – (19) Taxation on cash flow hedges 31 (12) 96 (25) (270) Exchange differences on translation of foreign operations 31 83 (10) Recycling of foreign exchange loss on disposal of business 31 (10) – – Governance Report Directors’ Taxation on related exchange differences 31 (41) – 32 (10) Actuarial losses on defined benefit pension schemes 31 (805) (399) Actuarial gain on defined benefit schemes of discontinued operations 2 – Taxation on actuarial losses on defined benefit pension schemes 31 241 111 (562) (288) Other comprehensive income, net of taxation (546) (586) Total comprehensive income for the period 310 (722) Attributable to: Equity holders of the parent 297 (723) Minority interests 33 13 1 Financial Statements 310 (722)

The notes on pages 68 to 150 form part of these Financial Statements. Shareholder Information

Centrica plc Annual Report and Accounts 2009 63

CE7088_CentricaAR_p062-160_Financial.indd 63 8/3/10 11:38:15 Financial Group Balance Sheet Statements continued

2009 2008 (restated) (i), (ii), (iii) 2007 (restated) (ii), (iii) 31 December Notes £m £m £m Non-current assets Goodwill 15 2,088 1,510 1,074 Other intangible assets 16 734 671 465 Property, plant and equipment (i) 18 6,059 4,689 3,910 Interests in joint ventures and associates 19 2,422 330 285 Deferred tax assets 27 534 311 27 Trade and other receivables 21 143 34 33 Derivative financial instruments (ii) 22 316 869 496 Securities 29 176 35 39 Retirement benefit assets 36 − 73 152 12,472 8,522 6,481 Current assets Inventories 20 382 412 241 Current tax assets 27 69 39 40 Trade and other receivables 21 4,181 5,335 3,423 Derivative financial instruments (ii) 22 492 1,156 592 Securities 29 74 63 50 Cash and cash equivalents 24 1,294 2,939 1,130 6,492 9,944 5,476 Assets of disposal groups classified as held for sale 38 478 − − Total assets 19,442 18,466 11,957 Current liabilities Trade and other payables (iii) 25 (3,955) (4,395) (3,400) Current tax liabilities (184) (357) (274) Bank overdrafts, loans and other borrowings 26 (86) (330) (221) Derivative financial instruments (ii) 22 (1,744) (2,670) (694) Provisions for other liabilities and charges 28 (193) (29) (140) (6,162) (7,781) (4,729) Net current assets 330 2,163 747 Non-current liabilities Trade and other payables 25 (82) (67) (20) Bank overdrafts, loans and other borrowings 26 (4,594) (3,218) (1,793) Derivative financial instruments (ii) 22 (1,006) (1,529) (823) Deferred tax liabilities 27 (1,179) (448) (596) Retirement benefit obligations 36 (565) (186) (55) Provisions for other liabilities and charges 28 (1,249) (865) (581) (8,675) (6,313) (3,868) Liabilities of disposal groups classified as held for sale 38 (350) − − Net assets 4,255 4,372 3,360

(i) Restated to capitalise borrowing costs on adoption of IAS 23 (Amendment), as explained in note 2. (ii) Restated to classify the non-current portions of derivative financial instruments from current assets and liabilities to non-current assets and liabilities, as explained in note 2. (iii) Restated to reflect the change in British Gas Services Limited’s revenue recognition policy, as explained in note 2.

CE7088_CentricaAR_p062-160_Financial.indd 64 8/3/10 11:38:15

2009 2008 (restated) (i),(ii) 2007 (restated) (ii)

31 December Notes £m £m £m Review – Business Report Directors’ Equity Called up share capital 30 317 315 227 Share premium account 778 729 685 Retained earnings (i),(ii) 3,103 2,759 1,301 Accumulated other comprehensive (loss)/income 31 (587) (40) 546 Other equity 32 581 549 542 Total shareholders’ equity 4,192 4,312 3,301 Minority interests in equity 33 63 60 59 Total minority interests and shareholders’ equity 4,255 4,372 3,360

(i) Restated to capitalise borrowing costs on adoption of IAS 23 (Amendment), as explained in note 2. (ii) Restated to reflect the change in British Gas Services Limited’s revenue recognition policy, as explained in note 2. The Financial Statements on pages 62 to 150 were approved and authorised for issue by the Board of Directors on 25 February 2010 and were signed below on its behalf by: Directors’ Report – Governance Report Directors’

Sam Laidlaw Nick Luff Chief Executive Group Finance Director The notes on pages 68 to 150 form part of these Financial Statements. Financial Statements Shareholder Information

Centrica plc Annual Report and Accounts 2009 65

CE7088_CentricaAR_p062-160_Financial.indd 65 8/3/10 11:38:15 Financial Group Statement of Statements continued Changes in Equity

Attributable to equity holders of the parent

Accumulated other Share comprehensive Other Minority capital Share Retained income equity interests Total (note 30) premium earnings (note 31) (note 32) Total (note 33) equity Year ended 31 December 2009 £m £m £m £m £m £m £m £m 1 January 2009 315 729 2,759 (40) 549 4,312 60 4,372 Profit for the year − − 844 − − 844 12 856 Other comprehensive income − − − (547) − (547) 1 (546) 315 729 3,603 (587) 549 4,609 73 4,682 Employee share schemes 2 49 9 − 3 63 − 63 Amounts arising on consolidation (i) − − − − 144 144 802 946 Repurchase of minority interests − − − − − − (201) (201) Disposal of Segebel S.A. (ii) − − 126 − (126) − (589) (589) Dividends paid by subsidiaries − − − − − − (11) (11) Dividends − − (635) − − (635) − (635) Taxation − − − − 12 12 − 12 Exchange adjustments − − − − (1) (1) (11) (12) 31 December 2009 317 778 3,103 (587) 581 4,192 63 4,255

Attributable to equity holders of the parent

Accumulated other Share comprehensive Other Minority capital Share Retained income equity interests Total (note 30) premium earnings (note 31) (note 32) Total (note 33) equity Year ended 31 December 2008 £m £m £m £m £m £m £m £m 1 January 2008 227 685 1,323 546 542 3,323 59 3,382 Prior year restatement (iii) − − (22) − − (22) − (22) 1 January 2008 (restated) 227 685 1,301 546 542 3,301 59 3,360 Profit for the year (iii), (iv) − − (137) − − (137) 1 (136) Other comprehensive income − − − (586) − (586) − (586) 227 685 1,164 (40) 542 2,578 60 2,638 Employee share schemes 2 44 17 − 7 70 − 70 Rights Issue 86 − − − 2,078 2,164 − 2,164 Transfer − − 2,078 − (2,078) − − − Dividends − − (500) − − (500) − (500) 31 December 2008 315 729 2,759 (40) 549 4,312 60 4,372

(i) Gains on revaluation of previously held investments, as revalued on full consolidation, and recognition of minority interests. (ii) Transfer of revaluation gain on Segebel S.A. to retained earnings and de-recognition of minority interests. (iii) Restated to reflect the change in British Gas Services Limited’s revenue recognition policy, as explained in note 2. (iv) Restated to capitalise borrowing costs on adoption of IAS 23 (Amendment), as explained in note 2. The notes on pages 68 to 150 form part of these Financial Statements.

CE7088_CentricaAR_p062-160_Financial.indd 66 8/3/10 11:38:15 Group Cash Flow Statement

2008

2009 (restated) (i) Review – Business Report Directors’ Year ended 31 December Notes £m £m Cash generated from continuing operations 3,082 1,395 Income taxes paid (329) (374) Net petroleum revenue tax paid (174) (533) Interest received 13 23 Interest paid (3) (47) Payments relating to exceptional charges (203) (74) Net cash flow from continuing operating activities 34 2,386 390 Net cash flow from discontinued operating activities 34 261 (93) Net cash flow from operating activities 2,647 297 Purchase of Venture Production plc net of cash and cash equivalents acquired 37 (1,115) – Purchase of other businesses net of cash and cash equivalents acquired 37 (438) (395) Sale of businesses net of cash and cash equivalents disposed of 870 –

Purchase of intangible assets 6 (604) (169) – Governance Report Directors’ Disposal and surrender of intangible assets 43 12 Purchase of property, plant and equipment 6 (594) (617) Disposal of property, plant and equipment – 11 Investments in British Energy associates (2,272) – Investments in other joint ventures and associates (19) – Repayments of loans to, and disposal of investments in, joint ventures and associates 19 18 19 Interest received 31 63 Net purchase of securities (128) (22) Net cash flow from continuing investing activities (4,208) (1,098) Net cash flow from discontinued investing activities (312) (24) Net cash flow from investing activities (4,520) (1,122) Issue of ordinary share capital (ii) 30 30 2,202 Financial Statements Purchase of treasury shares (5) (3) Financing interest paid (238) (104) Cash inflow from additional debt 1,887 1,513 Cash outflow from payment of capital element of finance leases (22) (20) Cash outflow from repayment of other debt (872) (175) Net cash flow from increase in debt 34 993 1,318 Realised net foreign exchange gain/(loss) on cash settlement of net investment hedges 18 (117) Realised net foreign exchange loss on cash settlement of other derivative contracts (20) (193)

Equity dividends paid 12 (635) (500) Shareholder Information Net cash flow from continuing financing activities 143 2,603 Net cash flow from discontinued financing activities 161 – Net cash flow from financing activities 304 2,603 Net (decrease)/increase in cash and cash equivalents (1,569) 1,778 Cash and cash equivalents at 1 January 2,904 1,100 Effect of foreign exchange rate changes (50) 26 Cash and cash equivalents at 31 December 1,285 2,904 Included in the following lines of the Balance Sheet: Cash and cash equivalents 24 1,294 2,939 Bank overdrafts, loans and other borrowings (28) (35) Assets of disposal groups classified as held for sale 38 19 – 1,285 2,904

(i) Restated to present the European Energy segment, with the exception of the Group’s operations in Germany, as a discontinued operation, as explained in note 38. (ii) On 15 December 2008 the Group raised £2,164 million of proceeds, net of £65 million of issue costs, through a Rights Issue. The notes on pages 68 to 150 form part of these Financial Statements.

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1. General information £10 million respectively. The impact on deferred tax liabilities and the related taxation charge in 2008 was not material. The Centrica plc is a Company domiciled and incorporated in the UK resulting impact on both basic and diluted earnings per share for under the Companies Act 1985. The address of the registered 2009 was an increase of 0.5p (2008: 0.2p). office is given on page 44. The nature of the Group’s operations • IFRS 8, Operating Segments, effective from 1 January 2009. and principal activities are set out in note 6 and in the Directors’ This standard replaces IAS 14, Segment Reporting and requires Report – Business Review on pages 4 to 34. segmental information reported to be based on that which the The consolidated Financial Statements of Centrica plc are Group’s Executive Committee uses internally for the purposes of presented in pounds sterling. Operations and transactions evaluating the performance of the Group’s operating segments conducted in currencies other than pounds sterling are included and making decisions about resource allocation between in the consolidated Financial Statements in accordance with the operating segments. The Group adopted IFRS 8 with effect from foreign currencies accounting policy set out in note 2. 1 January 2009. The adoption of IFRS 8 has resulted in certain changes to the Group’s reportable segments and the 2. Summary of significant accounting policies information disclosed (see note 6). The measure of operating profit used by management to evaluate segment performance The principal accounting policies applied in the preparation of and to allocate resources is adjusted operating profit. Adjusted these consolidated Financial Statements are set out below. These operating profit is operating profit before exceptional items and policies have been applied consistently to all the years presented, certain re-measurements and before depreciation resulting from unless otherwise stated. fair valuing property, plant and equipment to their acquisition- Basis of preparation date fair values on the acquisition of strategic investments as The consolidated Financial Statements have been prepared in described in section (d) below. Additionally, adjusted operating accordance with International Financial Reporting Standards (IFRS) profit includes the Group’s share of the results from joint as adopted by the European Union (EU) and therefore comply with ventures and associates before interest and taxation. Article 4 of the EU IAS Regulation. • ‘Improvements to IFRSs’ contains amendments to various existing standards, most being effective from 1 January 2009. The consolidated Financial Statements have been prepared on the One of these improvements envisions that not all derivative historical cost basis, except for derivative financial instruments, financial instruments be classified as current. The Group has available-for-sale financial assets, financial instruments designated classified those derivatives held for the purpose of Energy as at fair value through profit or loss on initial recognition, and the Procurement and Treasury Management as current or non- assets and liabilities of the Group pension schemes that have been current based on expected settlement dates. Where the measured at fair value. The carrying values of recognised assets derivative is held for proprietary energy trading, it remains and liabilities that are hedged items in fair value hedges, and are classified as current. The Group adopted this improvement with otherwise carried at cost, are adjusted to record changes in the fair effect from 1 January 2009, prior to which all derivatives held for values attributable to the risks that are being hedged. The principal trading under IAS 39 were classified as current irrespective of accounting policies adopted are set out below. settlement date. This change in presentation has resulted in recognition of non-current derivative financial assets of The preparation of Financial Statements in conformity with IFRS as £316 million, current derivative financial assets of £492 million, adopted by the EU requires the use of certain critical accounting non-current derivative financial liabilities of £1,006 million and estimates. It requires management to exercise its judgement in the current derivative financial liabilities of £1,744 million at processes of applying the Group’s accounting policies. The areas 31 December 2009. The impact on comparatives has been involving a higher degree of judgement, complexity or areas where to report an increase in non-current derivative financial assets assumptions and estimates are significant to the consolidated of £674 million (2007: £424 million), a decrease in current Financial Statements are described in note 3. derivative financial assets of £564 million (2007: £322 million), (a) Standards, amendments and interpretations effective an increase in non-current derivative financial liabilities of £1,372 in 2009 million (2007: £812 million) and a decrease in current derivative At the date of authorisation of these consolidated Financial financial liabilities of £1,262 million (2007: £710 million). Statements, the following standards and amendments to existing • IAS 1 (Revised), Presentation of Financial Statements, effective standards were effective for the current period: from 1 January 2009. The revised standard prohibits the presentation of items of income and expense in the Statement of • IAS 23 (Amendment), Borrowing Costs, effective from 1 January Changes in Equity, requiring non-shareholder changes in equity 2009. The Amendment requires an entity to capitalise borrowing to be presented separately from shareholder changes in equity. costs directly attributable to the acquisition, construction or All non-shareholder changes in equity are required to be production of a qualifying asset (one that takes a substantial presented in a performance statement. IAS 1 (Revised) permits a period of time to get ready for use or sale) as part of the cost of choice as to whether to present a single performance statement that asset. The option of immediately expensing such borrowing (being a Statement of Comprehensive Income) or two costs was removed. The Group adopted IAS 23 (Amendment) statements (being an Income Statement and a Statement of retrospectively and applied a commencement date of 1 January Comprehensive Income). The Group has elected to present two 2008 for qualifying projects. The adoption of IAS 23 statements: an Income Statement and a Statement of (Amendment) has resulted in an increase to the closing net book Comprehensive Income. Other changes require the Statement of value of property, plant and equipment and an increase to Changes in Equity to be shown as a Primary Statement. These deferred tax liabilities at 31 December 2009 amounting to consolidated Financial Statements have been prepared under £43 million (2008: £9 million) and £10 million respectively, and a the revised disclosure requirements. reduction to interest expense and increase to the tax charge for the period amounting to £34 million (2008: £9 million) and

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• Improvements to IFRSs (2009), effective for annual periods

2. Summary of significant accounting policies Review – Business Report Directors’ continued beginning on or after 1 July 2009 (or later), subject to EU endorsement. The Improvements to IFRSs (2009) contains • IFRS 7 (Amendment), Improving Disclosures about Financial amendments to various existing standards, most being effective Instruments, effective from 1 January 2009. The amendment for accounting periods beginning on or after 1 July 2009; and requires enhanced disclosures in relation to financial instruments • IFRS 9, Financial Instruments, effective for annual periods measured at fair value. The amendment also requires additional beginning on or after 1 January 2013, subject to EU disclosures aimed at improving users’ ability to evaluate the endorsement. The standard is part of a wider project to replace nature and extent of liquidity risk related to financial instruments. IAS 39, Financial Instruments: Recognition and Measurement. The following amendments to existing standards and The standard establishes two primary measurement categories interpretations were also effective for the current period, but the for financial assets; amortised cost and fair value, for which adoption of these amendments to existing standards and classification is based on an entity’s business model and the interpretations did not have a material impact on the Financial contractual cash flow characteristics of the financial asset. Statements of the Group: The impact of adopting these standards and amendments to existing standards is under assessment. • IAS 32 (Amendment), Financial Instruments: Presentation, and Directors’ Report – Governance Report Directors’ IAS 1 (Amendment), Presentation of Financial Statements – The Directors anticipate that the adoption of the following Puttable financial instruments and obligations arising on standards, interpretations and amendments to existing standards liquidation; and interpretations in future periods, which were also in issue at • IFRS 1 (Amendment), First-time adoption of IFRS, and IAS 27 the date of authorisation of these Financial Statements, will have (Amendment), Consolidated and Separate Financial Statements; no material impact on the Financial Statements of the Group: • IFRS 2 (Amendment), Share-based Payment − Vesting Conditions and Cancellations; • IFRIC 17, Distributions of Non-cash Assets to Owners, effective • IFRIC 13, Customer Loyalty Programmes; for annual periods beginning on or after 1 July 2009; • IFRIC 15, Agreements for the Construction of Real Estate; • IAS 39 (Amendment), Financial Instruments: Recognition and • IFRIC 16, Hedges of a Net Investment in a Foreign Operation; Measurement – Eligible Hedged Items, effective for annual • IFRIC 18, Transfers of Assets from Customers; periods beginning on or after 1 July 2009; • IAS 39 (Amendment), Reclassification of Financial Assets: • IFRS 1 (Revised), First-time Adoption of IFRS, effective for annual Effective Date and Transition; and periods beginning on or after 1 July 2009;

• IFRIC 9 (Amendment), Re-assessment of Embedded Derivatives, • IFRS 2 (Amendment), Share-based Payment – Group Cash- Financial Statements and IAS 39 (Amendment), Financial Instruments: Recognition settled Share-based Payment Transactions, effective for annual and Measurement. periods commencing on or after 1 January 2010, subject to EU endorsement; (b) Standards, amendments and interpretations that are not yet • IFRS 1 (Amendment), Additional Exemptions for First-time effective and that have not been early adopted by the Group Adopters, effective for annual periods commencing on or after At the date of authorisation of these Financial Statements, the 1 January 2010, subject to EU endorsement; following standards, amendments to existing standards and • IAS 32 (Amendment), Classification of Rights Issues, effective for interpretations, which have not been applied in these consolidated annual periods commencing on or after 1 February 2010; Financial Statements, were in issue but not yet effective: • IFRIC 14 (Amendment), Prepayments of a Minimum Funding Shareholder Information Requirement, effective for annual periods beginning on or after • IFRS 3 (Revised), Business Combinations, effective for annual periods beginning on or after 1 July 2009. The revised standard 1 January 2011, subject to EU endorsement; continues to apply the acquisition method to business • IFRIC 19, Extinguishing Financial Liabilities with Equity combinations with some significant changes. For example, all Instruments, effective for annual periods beginning on or after payments to purchase a business are to be recorded at fair 1 July 2010, subject to EU endorsement; value at acquisition date, with contingent payments classified as • IAS 24 (Revised), Related Party Disclosures, effective for annual debt subsequently re-measured through the income statement. periods beginning on or after 1 January 2011, subject to EU All acquisition related costs should be expensed. There is a endorsement; and choice on an acquisition-by-acquisition basis to measure the • IFRS 1 (Amendment), Limited Exemption from Comparative non-controlling interest in the acquiree at either fair value or at IFRS 7 Disclosures for First-time Adopters, effective for annual the non-controlling interest’s proportionate share of the periods beginning on or after 1 July 2010, subject to EU acquiree’s net assets. The Group will adopt IFRS 3 (Revised) to endorsement. all business combinations from 1 January 2010. There is no (c) Income Statement presentation requirement to restate previous acquisitions, therefore any The Group’s Income Statement and segmental note separately impact will only affect new business combinations; identify the effects of re-measurement of certain financial • IAS 27 (Revised), Consolidated and Separate Financial instruments, and items which are exceptional, in order to provide Statements, effective for annual periods beginning on or after readers with a clear and consistent presentation of the Group’s 1 July 2009. The revised standard requires the effects of all underlying performance, as described below. transactions with non-controlling interests to be recorded in equity if there is no change in control and these transactions will no longer result in goodwill or gains and losses. The revised standard also specifies the accounting when control is lost. Any remaining interest in the entity is re-measured to fair value and a gain or loss is recognised in profit or loss. The Group will adopt IAS 27 (Revised) prospectively from 1 January 2010;

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2. Summary of significant accounting policies In addition, certain re-measurements includes the effects of continued unwinding the acquisition-date fair values attributable to forward energy procurement and energy sales contracts arising on the (i) Certain re-measurements acquisition of Strategic Investments, as described below in section As part of its energy procurement activities, the Group enters into (d). The Group has shown the effect of unwinding the acquisition- a range of commodity contracts designed to achieve security of date fair values attributable to forward energy procurement and energy supply. These contracts comprise both purchases and energy sales contracts for these investments separately as a sales and cover a wide range of volumes, prices and timescales. certain re-measurement as the intention is to use these energy The majority of the underlying supply comes from high-volume, supplies in the normal course of business and management long-term contracts which are complemented by short-term believes the ultimate net charge reflected before the unwind of arrangements. These short-term contracts are entered into for the acquisition-date fair values will be consistent with the price of purpose of balancing energy supplies and customer demand and energy agreed within these contracts. Such presentation is to optimise the price paid by the Group. Short-term demand can consistent with the internal performance measures used by the vary significantly as a result of factors such as weather, power Group. generation profiles and short-term movements in market prices. (ii) Exceptional items Many of the energy procurement contracts are held for the As permitted by IAS 1 (Revised), Presentation of Financial purpose of receipt or delivery of commodities in accordance with Statements, certain items are presented separately. The items that the Group’s purchase, sale or usage requirements and are the Group separately presents as exceptional are items which are therefore out of scope of IAS 39. However, a number of contracts of a non-recurring nature and, in the judgement of the Directors, are considered to be derivative financial instruments and are need to be disclosed separately by virtue of their nature, size or required to be fair valued under IAS 39, primarily because their incidence in order to obtain a clear and consistent presentation of terms include the ability to trade elements of the contracted the Group’s underlying business performance. Items which may be volumes on a net-settled basis. considered exceptional in nature include disposals of businesses, The Group has shown the fair value adjustments arising on these business restructurings, renegotiation of significant contracts and contracts separately in the certain re-measurements column. This asset write-downs. is because the intention of management is, subject to short-term (d) Use of adjusted profit measures demand balancing, to use these energy supplies to meet customer The Directors believe that reporting adjusted profit and adjusted demand. Accordingly, management believes the ultimate net earnings per share measures provides additional useful information charge to cost of sales will be consistent with the price of energy on business performance and underlying trends. These measures agreed in these contracts and that the fair value adjustments will are used for internal performance purposes. The adjusted reverse as the energy is supplied over the life of the contract. This measures in this report are not defined terms under IFRS and makes the fair value re-measurements very different in nature from may not be comparable with similarly titled measures reported by costs arising from the physical delivery of energy in the period. other companies. At the balance sheet date the fair value represents the difference The principal adjustments made to reported profits in arriving at between the prices agreed in the respective contracts and the adjusted profit are as follows: actual or anticipated market price of acquiring the same amount of energy on the open market. The movement in the fair value taken Depreciation of fair value uplifts to property, plant and to certain re-measurements in the Income Statement represents equipment on acquiring Strategic Investments the unwinding of the contracted volume delivered or consumed IFRS requires that a fair value exercise is undertaken allocating the during the period, combined with the change in fair value of future cost of acquiring controlling interests and interests in associates to contracted energy as a result of movements in forward energy the fair value of the acquired identifiable assets, liabilities and prices during the year. contingent liabilities. Any difference between the cost of acquiring the interest and the fair value of the acquired net assets, which These adjustments represent the significant majority of the items includes identified contingent liabilities, is recognised as included in certain re-measurements. acquired goodwill. The fair value exercise is performed at the In addition to these, however, the Group has identified a number date of acquisition. of comparable contractual arrangements where the difference The Directors have determined that for Strategic Investments it is between the price which the Group expects to pay or receive important to separately identify the earnings impact of increased under a contract and the market price is required to be fair valued depreciation arising from the acquisition-date fair value uplifts by IAS 39. These additional items relate to cross-border made to property, plant and equipment over their useful economic transportation or transmission capacity, storage capacity and lives. As a result of the nature of fair value assessments in the contracts relating to the sale of energy by-products, on which energy industry the value attributed to strategic assets is a economic value has been created which is not wholly recognised subjective judgement based on a wide range of complex variables under the requirements of IAS 39. For these arrangements the at a point in time. The subsequent depreciation of the fair value related fair value adjustments are also included under certain uplifts bears little relationship to current market conditions, re-measurements. operational performance or underlying cash generation. These arrangements are managed separately from proprietary Management therefore reports and monitors the operational energy trading activities where trades are entered into speculatively performance of Strategic Investments before the impact of for the purpose of making profits in their own right. These depreciation on fair value uplifts to property, plant and equipment proprietary trades are included in the results before certain and the segmental results are presented on a consistent basis. re-measurements.

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Whilst the impact of increased depreciation and related taxation

2. Summary of significant accounting policies Review – Business Report Directors’ continued through unwinding the fair value uplifts to the nuclear power stations is included in the share of associate’s post-acquisition The Group has two Strategic Investments for which reported result included in overall reported Group profit for the year, the profits before certain re-measurements and exceptional items have Directors have reversed these impacts in arriving at adjusted profit been adjusted in arriving at adjusted profit and adjusted earnings from continuing operations for the year. The acquisition-date fair per share. These Strategic Investments relate to the acquisition of values attributed to the nuclear power stations require a subjective Venture Production plc (‘Venture’) for £1,253 million, where a judgement based on a wide range of complex variables at a point controlling interest was gained on 27 August 2009 and the in time. The subsequent depreciation bears little relationship to acquisition of the 20% interest in Lake Acquisitions Limited (‘British current market conditions, operational performance or underlying Energy’), which owns the British Energy Group on 26 November cash generation of these assets. This adjusted profit measure is 2009 for £2,255 million and is accounted for as an associate. consistent with the internal measures used by the Group in (i) Venture reporting and monitoring performance and the segmental results Each of Venture’s identifiable assets, liabilities and contingent are presented on a consistent basis. liabilities acquired has been consolidated into the Group Financial The impact of unwinding energy procurement contracts and

Statements at their acquisition-date fair values (27 August 2009). energy sales contracts at their acquisition-date fair values is – Governance Report Directors’ Significant adjustments have been made to the acquired property, included within certain re-measurements and is excluded in plant and equipment to report oil and gas field interests at their arriving at adjusted profit. acquisition-date fair values which are subsequently depreciated through the Income Statement over their respective useful (e) British Gas Services Limited – revenue recognition economic lives using the unit of production method. Within British Gas Services Limited (BGSL), included within the Downstream UK – Residential services segment, revenue on fixed Whilst the impact of unwinding the property, plant and equipment fee service contracts has been recognised on a straight-line basis at their acquisition-date fair values is included in overall reported over the contract period. Annual contracts were divided into 12 profit for the year, the Directors have reversed the earnings impact equal amounts which were taken to income each month. The of the increased depreciation and related taxation resulting from whole of the first month’s income was recorded in the calendar fair value uplifts to the acquired oil and gas interests in order to month of the sale or renewal. arrive at adjusted profit from continuing operations after taxation. The acquisition-date fair values attributed to these interests require Standard insurance accounting practice is to recognise revenue

a subjective judgement based on a wide range of complex with regard to the incidence of risk over the period of cover. If Financial Statements variables at a point in time. The subsequent depreciation bears there is a marked unevenness in the incidence of risk over the little relationship to current market conditions, operational period of cover, a basis which reflects the profile of risk should be performance or underlying cash generation of these interests. This used. Whilst BGSL is not an insurer, its products have some adjusted profit measure is consistent with the internal measures similarities to insurance products for accounting purposes and the used by the Group in reporting and monitoring performance and Directors consider that the accounting recognition of income the segmental results are presented on a consistent basis. should be undertaken on a similar basis. This is consistent with the Group’s strategy and the Group has announced plans to convert (ii) British Energy many of BGSL’s products to insurance products over the next two Lake Acquisitions Limited was formed by EDF for the purpose of

years and to effect this plan has created British Gas Insurance Shareholder Information acquiring the controlling interest in the British Energy Group, which Limited (BGIL) which in 2009 received regulatory approval from the it acquired on 5 January 2009. Financial Services Authority to sell insurance products. While Centrica acquired its 20% interest in Lake Acquisitions Limited and income in BGSL has been accrued on a straight-line basis, the thus British Energy on 26 November 2009. As the investment in workload undertaken under the contracts is significantly higher in British Energy is accounted for as an investment in an associate, the winter. BGSL has therefore moved to recognising revenue, still IAS 28 requires that a notional fair value exercise is undertaken at over the contract period, but in line with the workload and the risk the date of acquisition to allocate the cost of the investment to the under the contracts. In making the change the deferred income acquired identifiable assets, liabilities and contingent liabilities. IAS has been calculated with reference to the number of days 28 requires investments in associates to be accounted for using remaining in the contract period to reflect the point at which the equity method such that the Group reports its share of the contracts are entered into more precisely. associate’s profit or loss, which is net of interest and taxation, The impact of the new policy is to reduce revenue in 2009 by within the Group’s Income Statement. IAS 28 requires that the £2 million (2008: £2 million) and brought forward reserves by Group’s share of the associate’s profit or loss includes the effects £30 million, with an offsetting £31 million credit to deferred income. of unwinding the fair value adjustments arising from the notional A corporation tax adjustment has been applied as a result, with a fair value exercise undertaken at acquisition date. total £9 million reduction in the tax creditor by way of a decreased The most significant fair value adjustments arising on the 2008 tax charge of £1 million and an increase to the brought acquisition of the 20% investment in British Energy relate to the fair forward reserves of £8 million. value uplifts made to the British Energy nuclear power stations to report the property, plant and equipment at their acquisition-date fair values and fair value uplifts made to British Energy’s energy procurement contracts and energy sales contracts to report these at their acquisition-date fair values.

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2. Summary of significant accounting policies supplier, and is included in accrued energy income within trade continued and other receivables. Basis of consolidation Proprietary energy trading: Revenue comprises both realised The Group Financial Statements consolidate the Financial (settled) and unrealised (fair value changes) net gains and losses Statements of the Company and entities controlled by the from trading in physical and financial energy contracts. Company (its subsidiaries) up to 31 December each year, and incorporate the results of its share of jointly controlled entities and Storage services: Storage capacity revenues are recognised evenly over the contract period, whilst commodity revenues for the associates using the equity method of accounting. injection and withdrawal of gas are recognised at the point of gas Control is achieved where the Company has the power to govern flowing into or out of the storage facilities. Gas purchases and gas the financial and operating policies of an investee entity so as to sales transactions entered into to optimise the performance of the obtain benefits from its activities. gas storage facilities are presented net within revenue.

The results of subsidiaries acquired or disposed of during the year Home services and fixed-fee service contracts: Revenue from are consolidated from the effective date of acquisition or up to the fixed-fee service contracts is recognised in the Income Statement effective date of disposal, as appropriate. Where necessary, with regard to the incidence of risk over the life of the contract, adjustments are made to the financial statements of subsidiaries, reflecting the seasonal propensity of claims to be made under the associates and jointly-controlled entities to bring the accounting contracts and the benefits receivable by the customer, which span policies used into line with those used by the Group. the life of the contract as a result of emergency maintenance being available throughout the contract term. Amounts paid in advance All intra-Group transactions, balances, income and expenses are greater than recognised revenue are treated as deferred income, eliminated upon consolidation. with any paid in arrears recognised as accrued income. For one-off Interests in joint ventures services, such as installations, revenue is recognised at the date of A jointly controlled entity is a joint venture which involves the service provision. establishment of an entity to engage in economic activity, which Gas production: Revenue associated with exploration and the Group controls jointly with its fellow venturers. Under the equity production sales (of natural gas, crude oil and condensates) is method, investments in jointly controlled entities are carried at cost recognised when title passes to the customer. Revenue from the plus post-acquisition changes in the Group’s share of net assets of production of natural gas, oil and condensates in which the Group the jointly controlled entity, less any impairment in value in has an interest with other producers is recognised based on the individual investments. The Income Statement reflects the Group’s Group’s working interest and the terms of the relevant production- share of the results of operations after tax of the jointly controlled sharing arrangements (the entitlement method). Where differences entity. arise between production sold and the Group’s share of Certain exploration and production activity is conducted through production, this is accounted for as an overlift or underlift (see joint ventures, where the venturers have a direct interest in and separate accounting policy). Gas purchases and gas sales entered jointly control the assets of the venture. The results, assets, into to optimise the performance of gas production facilities are liabilities and cash flows of these jointly controlled assets are presented net within revenue. included in the consolidated Financial Statements in proportion Power generation: Revenue is recognised on the basis of power to the Group’s interest. supplied during the period. Power purchases and sales entered Interests in associates into to optimise the performance of power generation facilities are An associate is an entity in which the Group has an equity interest presented net within revenue. and over which it has the ability to exercise significant influence. Interest income: Interest income is accrued on a time basis, by Under the equity method, investments in associates are carried at reference to the principal outstanding and at the effective interest cost plus post-acquisition changes in the Group’s share of the net rate applicable, which is the rate that exactly discounts estimated assets of the associate, less any impairment in value in individual future cash receipts through the expected life of the financial asset investments. The Income Statement reflects the Group’s share of to that asset’s net carrying value. the results of the associate, which is net of interest and taxation and presents this as a single line item in arriving at Group operating Cost of sales profit on the face of the Income Statement. Energy supply includes the cost of gas and electricity produced and purchased during the period taking into account the industry Revenue reconciliation process for total gas and total electricity usage by Revenue is recognised to the extent that it is probable that the supplier, and related transportation, distribution, royalty costs and economic benefits will flow to the Group and the revenue can be bought-in materials and services. measured reliably. Revenue includes amounts receivable for goods and services provided in the normal course of business, net of Home services’ and fixed-fee service contracts cost of sales discounts, rebates, VAT and other sales-related taxes. includes direct labour and related overheads on installation work, repairs and service contracts in the period. Energy supply: Revenue is recognised on the basis of energy supplied during the period. Revenue for energy supply activities includes an assessment of energy supplied to customers between the date of the last meter reading and the year end (unread). Unread gas and electricity is estimated using historical consumption patterns, taking into account the industry reconciliation process for total gas and total electricity usage by

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Fair value is measured using methods appropriate to each of the

2. Summary of significant accounting policies Review – Business Report Directors’ continued different schemes as follows:

Segmental reporting LTIS: awards up A Black-Scholes valuation augmented by a The Group’s operating segments are reported in a manner to 2005 Monte Carlo simulation to predict the total consistent with the internal reporting provided to and regularly shareholder return performance reviewed by the Group’s Executive Committee for the purposes of evaluating segment performance and allocating resources. LTIS: EPS awards Market value on the date of grant after 2005 Borrowing costs LTIS: TSR awards A Monte Carlo simulation to predict the Borrowing costs that arise in connection with the acquisition, after 2005 total shareholder return performance construction or production of a qualifying asset are capitalised and subsequently amortised in line with the depreciation of the related Sharesave Black-Scholes asset. Borrowing costs are capitalised from the time of acquisition ESOS Black-Scholes using an adjusted option or from the beginning of construction or production until the point life assumption to reflect the possibility of at which the qualifying asset is ready for use. Where a specific early exercise

financing arrangement is in place, the specific borrowing rate for – Governance Report Directors’ that arrangement is applied. For non-specific financing SAS, SIP, DMSS, Market value on the date of grant arrangements, a Group financing rate representative of the RSS, ESPP and weighted average borrowing rate of the Group is used. Borrowing DBP costs not arising in connection with the acquisition, construction Foreign currencies or production of a qualifying asset are expensed. The consolidated Financial Statements are presented in pounds Carbon Emissions Reduction Target programme (CERT) sterling, which is the functional currency of the Company and the UK-licensed energy suppliers are set a carbon emission reduction Group’s presentational currency. Each entity in the Group target by the Government which is proportional to the size of their determines its own functional currency and items included in the customer base. The current CERT programme runs from April Financial Statements of each entity are measured using that 2008 to March 2011. The target is subject to an annual adjustment functional currency. Transactions in foreign currencies are, on initial throughout the programme period to take account of changes to recognition, recorded at the functional currency rate ruling at the a UK-licensed energy supplier’s customer base. Energy suppliers date of the transaction. Monetary assets and liabilities

can meet the target through expenditure on qualifying projects denominated in foreign currencies are re-translated at the Financial Statements which give rise to carbon savings. The carbon savings can be functional currency rate of exchange ruling at the balance sheet transferred between energy suppliers. The Group charges the date. All differences are included in the Income Statement for the costs of the programme to cost of sales and capitalises costs year with the exception of exchange differences on foreign incurred in deriving carbon savings in excess of the annual target currency borrowings that provide a hedge against a net investment as inventory which is valued at the lower of cost or net realisable in a foreign entity. These are taken directly to equity until the value and which may be used to meet the carbon emissions disposal or partial disposal of the net investment, at which time reduction target in subsequent periods or be transferred to third they are recognised in the Income Statement. Non-monetary items parties. The inventory is carried on a first-in, first-out basis. The that are measured in terms of historical cost in a currency other

carbon emission reduction target for the programme period is than the functional currency of the entity concerned are translated Shareholder Information allocated to reporting periods on a straight-line basis as adjusted using the exchange rates as at the dates of the initial transactions. by the annual determination process. For the purpose of presenting consolidated Financial Statements, Employee share schemes the assets and liabilities of the Group’s foreign subsidiary The Group operates a number of employee share schemes, undertakings, jointly controlled entities and associates are detailed in the Remuneration Report on pages 45 to 59 and translated into pounds sterling at exchange rates prevailing on the in note 35, under which it makes equity-settled share-based balance sheet date. The results of foreign subsidiary undertakings, payments to certain employees. Equity-settled share-based jointly controlled entities and associates are translated into pounds payments are measured at fair value at the date of grant (excluding sterling at average rates of exchange for the relevant period. the effect of non-market-based vesting conditions). The fair value Exchange differences arising from the retranslation of the opening determined at the grant date is expensed on a straight-line basis net assets and the results are transferred to the Group’s foreign together with a corresponding increase in equity over the vesting currency translation reserve, a separate component of equity, and period, based on the Group’s estimate of the number of awards are reported in the Statement of Comprehensive Income. In the that will vest, and adjusted for the effect of non-market-based event of the disposal of an undertaking with assets and liabilities vesting conditions. denominated in a foreign currency, the cumulative translation difference arising in the foreign currency translation reserve is charged or credited to the Income Statement on disposal.

Exchange differences on foreign currency borrowings, foreign currency swaps and forward exchange contracts used to hedge foreign currency net investments in foreign subsidiary undertakings, jointly controlled entities and associates are taken directly to reserves and are reported in the Statement of Comprehensive Income. All other exchange movements are recognised in the Income Statement for the year.

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2. Summary of significant accounting policies Other intangible assets continued Intangible assets acquired separately are measured on initial recognition at cost. Intangible assets include emissions trading Business combinations and goodwill schemes, renewable obligation certificates and certain exploration The acquisition of subsidiaries is accounted for using the purchase and evaluation expenditures, the accounting policies for which are method. The cost of the acquisition is measured as the cash paid dealt with separately below. For purchased application software, and the aggregate of the fair values, at the date of exchange, of for example investments in customer relationship management and other assets given, liabilities incurred or assumed, and equity billing systems, cost includes contractors’ charges, materials, instruments issued by the Group in exchange for control of the directly-attributable labour and directly-attributable overheads. acquiree, plus any costs directly attributable to the business combination. The acquiree’s identifiable assets, liabilities and Capitalisation begins when expenditure for the asset is being contingent liabilities that meet the conditions for recognition under incurred and activities necessary to prepare the asset for use are IFRS 3, Business Combinations, are recognised at their fair value in progress. Capitalisation ceases when substantially all the at the acquisition date, except for non-current assets (or disposal activities that are necessary to prepare the asset for use are groups) that are classified as held for resale in accordance with complete. Amortisation commences at the point of commercial IFRS 5, Non-Current Assets Held for Sale and Discontinued deployment. The cost of intangible assets acquired in a business Operations, which are recognised and measured at fair value less combination is their fair value as at the date of acquisition. costs to sell. Following initial recognition, intangible assets are carried at Goodwill arising on a business combination represents the excess cost less any accumulated amortisation and any accumulated of the cost of acquisition over the Group’s interest in the fair value impairment losses. The useful lives of intangible assets are of the identifiable assets, liabilities and contingent liabilities of a assessed to be either finite or indefinite. Intangible assets with subsidiary, jointly controlled entity or associate at the date of finite lives are amortised over their useful economic life and acquisition. Goodwill is initially recognised as an asset at cost and assessed for impairment whenever there is an indication that the is subsequently measured at cost less any accumulated intangible asset may be impaired. The amortisation period and the impairment losses. If, after reassessment, the Group’s interest in amortisation method for an intangible asset are reviewed at least the net fair value of the acquiree’s identifiable assets, liabilities and at each financial year end. Changes in the expected useful life or contingent liabilities exceeds the cost of the business combination, the expected pattern of consumption of future economic benefits the excess is recognised immediately in the Income Statement. embodied in the asset are accounted for on a prospective basis by changing the amortisation period or method, as appropriate, The interest of minority shareholders in the acquiree is measured and treated as changes in accounting estimates. initially at the minority’s proportion of the net fair value of the assets, liabilities and contingent liabilities recognised. Intangible assets are derecognised on disposal, or when no future economic benefits are expected from their use. Goodwill, which is recognised as an asset, is reviewed for impairment annually or more frequently if events or changes in Intangible assets with indefinite useful lives are tested for circumstances indicate that the carrying amount may be impaired. impairment annually, and whenever there is an indication that the Any impairment is recognised immediately in the Income intangible asset may be impaired, either individually or at the cash- Statement and is not subsequently reversed. generating unit level. Such intangibles are not amortised. The useful life of an intangible asset with an indefinite useful life is For the purpose of impairment testing, goodwill is allocated to reviewed annually to determine whether the indefinite life each of the Group’s cash-generating units or groups of cash- assessment continues to be supportable. If not, the change generating units that expect to benefit from the business in the useful life assessment from indefinite to finite is made on combination in which the goodwill arose. Cash-generating units a prospective basis. to which goodwill has been allocated are tested for impairment annually, or more frequently when there is an indication that the The amortisation period for the principal categories of intangible unit may be impaired. If the recoverable amount of the cash- assets are as follows: generating unit or groups of cash-generating units is less than the carrying amount of the unit, the impairment loss is recognised Application software up to 10 years immediately in the Income Statement and allocated first to reduce Licences up to 20 years the carrying amount of any goodwill allocated to the unit and then to the other assets of the unit pro rata on the basis of the carrying Consents up to 25 years amount of each asset in the unit. Any impairment is not Contractual customer relationships up to 20 years subsequently reversed. Identifiable acquired brands Indefinite On disposal of a subsidiary, associate or jointly controlled entity, the attributable amount of goodwill is included in the determination of the profit or loss on disposal.

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Assets held under finance leases are depreciated over their

2. Summary of significant accounting policies Review – Business Report Directors’ continued expected useful economic lives on the same basis as for owned assets, or where shorter, the lease term. EU Emissions Trading Scheme and renewable obligations certificates The carrying values of property, plant and equipment are reviewed for impairment when events or changes in circumstances indicate Granted CO2 emissions allowances received in a period are that the carrying value may not be recoverable. recognised initially at nominal value (nil value). Purchased CO2 emissions allowances are recognised initially at cost (purchase Residual values and useful lives are reassessed annually and, if price) within intangible assets. A liability is recognised when the necessary, changes are accounted for prospectively. level of emissions exceeds the level of allowances granted. The liability is measured at the cost of purchased allowances up to Exploration, evaluation and production assets the level of purchased allowances held, and then at the market Centrica uses the successful efforts method of accounting for price of allowances ruling at the balance sheet date, with exploration and evaluation expenditure. Exploration and evaluation movements in the liability recognised in operating profit. Forward expenditure associated with an exploration well, including contracts for the purchase or sale of CO2 emissions allowances acquisition costs related to exploration and evaluation activities, are measured at fair value with gains and losses arising from are capitalised initially as intangible assets. Certain expenditures changes in fair value recognised in the Income Statement. The such as geological and geophysical exploration costs are – Governance Report Directors’ intangible asset is surrendered at the end of the compliance period expensed. If the prospects are subsequently determined to be and written off to reflect the consumption of economic benefits at successful on completion of evaluation, the relevant expenditure that point in time. including licence acquisition costs is transferred to property, plant and equipment and depreciated on a unit of production basis. If Purchased renewable obligation certificates are recognised initially the prospects are subsequently determined to be unsuccessful on at cost within intangible assets. A liability for the renewables completion of evaluation, the associated costs are expensed in the obligation is recognised based on the level of electricity supplied period in which that determination is made. to customers, and is calculated in accordance with percentages set by the UK Government and the renewable obligation certificate All field development costs are capitalised as property, plant and buyout price for that period. The intangible asset is surrendered equipment. Such costs relate to the acquisition and installation of at the end of the compliance period and written off to reflect the production facilities and include development drilling costs, consumption of economic benefits at that point in time. project-related engineering and other technical services costs.

Property, plant and equipment, including rights and concessions Financial Statements Property, plant and equipment related to production activities, are depreciated from the Property, plant and equipment is included in the Balance Sheet commencement of production in the fields concerned, using at cost, less accumulated depreciation and any provisions for the unit of production method, based on all of the proven and impairment. probable reserves of those fields. Changes in these estimates The initial cost of an asset comprises its purchase price or are dealt with prospectively. construction cost and any costs directly attributable to bringing The net carrying value of fields in production and development is the asset into operation. The purchase price or construction cost compared on a field-by-field basis with the likely discounted future is the aggregate amount paid and the fair value of any other net revenues to be derived from the remaining commercial

consideration given to acquire the asset. reserves. An impairment loss is recognised where it is considered Shareholder Information Subsequent expenditure in respect of items of property, plant that recorded amounts are unlikely to be fully recovered from the and equipment such as the replacement of major parts, major net present value of future net revenues. Exploration and production inspections or overhauls, are capitalised as part of the cost of assets are reviewed annually for indicators of impairment. the related asset where it is probable that future economic benefits Overlift and underlift will arise as a result of the expenditure and the cost can be reliably Offtake arrangements for oil and gas produced from jointly owned measured. All other subsequent expenditure, including the costs operations are often such that it is not practical for each participant of day-to-day servicing, repairs and maintenance, is expensed to receive or sell its precise share of the overall production during as incurred. the period. This results in short-term imbalances between Freehold land is not depreciated. Other property, plant and cumulative production entitlement and cumulative sales, referred equipment, with the exception of upstream production assets, to as overlift and underlift. are depreciated on a straight-line basis at rates sufficient to write An overlift payable, or underlift receivable, is recognised at the off the cost, less estimated residual values, of individual assets balance sheet date and measured at market value, with over their estimated useful lives. The depreciation periods for the movements in the period recognised within cost of sales. principal categories of assets are as follows: Decommissioning costs Freehold and leasehold buildings up to 50 years Provision is made for the net present value of the estimated cost of decommissioning gas production facilities at the end of the Plant 5 to 20 years producing lives of fields, and storage facilities and power stations Power stations and wind farms up to 30 years at the end of the useful life of the facilities, based on price levels Equipment and vehicles 3 to 10 years and technology at the balance sheet date. Gas storage assets up to 40 years

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2. Summary of significant accounting policies If the recoverable amount of an asset (or cash-generating unit) is continued estimated to be less than its carrying amount, the carrying amount of the asset (cash-generating unit) is reduced to its recoverable When this provision gives access to future economic benefits, amount. An impairment loss is recognised immediately as an a decommissioning asset is recognised and included within expense. property, plant and equipment. Changes in these estimates and changes to the discount rates are dealt with prospectively and An impairment loss is reversed only if there has been a change in reflected as an adjustment to the provision and corresponding the estimate used to determine the asset’s recoverable amount decommissioning asset included within property, plant and since the last impairment loss was recognised. Where an equipment. For gas production facilities and offshore storage impairment loss subsequently reverses, the carrying amount of the facilities the decommissioning asset is amortised using the unit asset (cash-generating unit) is increased to the revised estimate of of production method, based on proven and probable reserves. its recoverable amount, but so that the increased carrying amount For power stations the decommissioning asset is amortised on does not exceed the carrying amount that would have been a straight-line basis over the useful life of the facility. The unwinding determined had no impairment loss been recognised for the asset of the discount on the provision is included in the Income (cash-generating unit) in prior years. A reversal of an impairment Statement within interest expense. loss is recognised as income immediately. After such a reversal the depreciation or amortisation charge, where relevant, is adjusted Leases in future periods to allocate the asset’s revised carrying amount, The determination of whether an arrangement is, or contains, less any residual value, on a systematic basis over its remaining a lease is based on the substance of the arrangement and requires useful life. an assessment of whether the fulfilment of the arrangement is dependent on the use of a specific asset or assets and the Non-current assets and disposal groups held for sale and arrangement conveys a right to use the asset. Leases are classified discontinued operations as finance leases whenever the terms of the lease transfer Non-current assets (and disposal groups) classified as held for sale substantially all the risks and rewards of ownership to the lessee. are measured at the lower of carrying amount and fair value less All other leases are classified as operating leases. Assets held costs to sell. No depreciation is charged in respect of non-current under finance leases are capitalised and included in property, plant assets classified as held for sale. and equipment at their fair value, or if lower, at the present value of Non-current assets and disposal groups are classified as held for the minimum lease payments, each determined at the inception of sale if their carrying amount will be recovered through a sale the lease. The obligations relating to finance leases, net of finance transaction rather than through continuing use. This condition is charges in respect of future periods, are included within bank loans regarded as met only when the sale is highly probable and the and other borrowings, with the amount payable within 12 months asset (or disposal group) is available for immediate sale in its included in bank overdrafts and loans within current liabilities. present condition. Management must be committed to the sale Lease payments are apportioned between finance charges and which should be expected to qualify for recognition as a completed reduction of the finance lease obligation so as to achieve a sale within one year from the date of classification. constant rate of interest on the remaining balance of the liability. Finance charges are charged directly against income. The profits or losses and cash flows that relate to a major component of the Group or geographical region that has been Payments under operating leases are charged to the Income sold or is classified as held for sale are presented separately Statement on a straight-line basis over the term of the relevant lease. from continuing operations as discontinued operations within the Income Statement and Cash Flow Statement. Impairment of property, plant and equipment and Inventories intangible assets (excluding goodwill) Inventories are valued on a weighted-average cost basis at the At each balance sheet date, the Group reviews the carrying lower of cost and estimated net realisable value after allowance for amounts of its intangible assets and property, plant and equipment redundant and slow-moving items, where applicable. to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the Take-or-pay contracts recoverable amount of the asset is estimated in order to determine Where payments are made to external suppliers under take-or-pay the extent of any impairment loss. Where the asset does not obligations for gas not taken, they are treated as prepayments and generate cash flows that are independent from other assets, the included within other receivables, as they generate future Group estimates the recoverable amount of the cash-generating economic benefits. unit to which the asset belongs. An intangible asset with an indefinite useful life is tested for impairment annually, and whenever Pensions and other post-retirement benefits there is an indication that the asset may be impaired. The Group operates a number of defined benefit pension schemes. The cost of providing benefits under the defined benefit Recoverable amount is the higher of fair value less costs to sell and schemes is determined separately for each scheme using the value in use. In assessing value in use, the estimated future cash projected unit credit actuarial valuation method. Actuarial gains flows are discounted to their present value using a pre-tax and losses are recognised in full in the period in which they occur. discount rate that reflects current market assessments of the time They are recognised in the Statement of Comprehensive Income. value of money. Discount rates are derived from the Group’s weighted average cost of capital. Risks specific to cash-generating units are reflected within cash flow forecasts.

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Deferred tax liabilities may be offset against deferred tax assets

2. Summary of significant accounting policies Review – Business Report Directors’ continued within the same taxable entity or qualifying local tax group. Any remaining deferred tax asset is recognised only when, on the basis The cost of providing retirement pensions and other benefits is of all available evidence, it can be regarded as probable that there charged to the Income Statement over the periods benefiting from will be suitable taxable profits, within the same jurisdiction, in the employees’ service. Past service cost is recognised immediately to foreseeable future, against which the deductible temporary the extent that the benefits are already vested, and otherwise is difference can be utilised. amortised on a straight-line basis over the average period until the benefits become vested. The difference between the expected Deferred tax is provided on temporary differences arising on return on scheme assets and the change in present value of subsidiaries, jointly controlled entities and associates, except scheme obligations resulting from the passage of time is where the timing of the reversal of the temporary difference can recognised in the Income Statement within interest income be controlled and it is probable that the temporary difference will or interest expense. not reverse in the foreseeable future.

The retirement benefit obligation or asset recognised in the Deferred tax is measured at the average tax rates that are Balance Sheet represents the present value of the defined benefit expected to apply in the periods in which the asset is realised

obligation of the schemes as adjusted for unrecognised past or liability settled, based on tax rates and laws that have been – Governance Report Directors’ service cost, and the fair value of the schemes’ assets. The enacted or substantively enacted by the balance sheet date. present value of the defined benefit obligation or asset is Measurement of deferred tax liabilities and assets reflects the determined by discounting the estimated future cash outflows tax consequences expected from the manner in which the asset using interest rates of high-quality corporate bonds that are or liability is recovered or settled. denominated in the currency in which the benefits are paid, and that have terms of maturity approximating to the terms of Financial instruments Financial assets and financial liabilities are recognised in the the related pension liability. Group Balance Sheet when the Group becomes a party to the Payments to defined contribution retirement benefit schemes contractual provisions of the instrument. Financial assets are are charged as an operating expense as they fall due. de-recognised when the Group no longer has the rights to cash flows, the risks and rewards of ownership or control of the asset. Provisions Financial liabilities are de-recognised when the obligation under Provisions are recognised when the Group has a present the liability is discharged, cancelled or expires.

obligation (legal or constructive) as a result of a past event, that Financial Statements can be measured reliably, and it is probable that the Group will (a) Trade receivables be required to settle that obligation. Provisions are measured at Trade receivables are recognised and carried at original invoice the Directors’ best estimate of the expenditure required to settle amount less an allowance for any uncollectible amounts. Provision the obligation at the balance sheet date, and are discounted to is made when there is objective evidence that the Group may not present value where the effect is material. Where discounting be able to collect the trade receivable. Balances are written off is used, the increase in the provision due to the passage of time when recoverability is assessed as being remote. is recognised in the Income Statement within interest expense. Onerous contract provisions are recognised where the unavoidable (b) Share capital Ordinary shares are classified as equity. Incremental costs directly costs of meeting the obligations under a contract exceed the attributable to the issue of new shares are shown in equity as a Shareholder Information economic benefits expected to be received under it. Contracts to deduction from the proceeds received. Own equity instruments purchase or sell energy are reviewed on a portfolio basis given the that are reacquired (treasury shares) are deducted from equity. fungible nature of energy, whereby it is assumed that the highest No gain or loss is recognised in the Income Statement on the priced purchase contract supplies the highest priced sales purchase, sale, issue or cancellation of the Group’s own contract and the lowest priced sales contract is supplied by the equity instruments. lowest priced purchase contract. (c) Cash and cash equivalents Taxation Cash and cash equivalents comprise cash in hand and current Current tax, including UK corporation tax, UK petroleum revenue tax and foreign tax is provided at amounts expected to be paid balances with banks and similar institutions, which are readily convertible to known amounts of cash and which are subject to (or recovered) using the tax rates and laws that have been enacted insignificant risk of changes in value and have an original maturity or substantively enacted by the balance sheet date. of three months or less. Deferred tax is recognised in respect of all temporary differences For the purpose of the Group Cash Flow Statement, cash and identified at the balance sheet date, except to the extent that the cash equivalents consist of cash and cash equivalents as defined deferred tax arises from the initial recognition of goodwill (if above, net of outstanding bank overdrafts. amortisation of goodwill is not deductible for tax purposes) or the initial recognition of an asset or liability in a transaction which is not (d) Interest-bearing loans and other borrowings a business combination and at the time of the transaction affects All interest-bearing loans and other borrowings are initially neither accounting profit nor taxable profit and loss. Temporary recognised at fair value net of directly attributable transaction differences are differences between the carrying amount of the costs. Group’s assets and liabilities and their tax base.

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2. Summary of significant accounting policies Certain purchase and sales contracts for the physical delivery of continued gas, power and oil are within the scope of IAS 39 due to the fact that they net settle or contain written options. Such contracts are After initial recognition, interest-bearing loans and other borrowings accounted for as derivatives under IAS 39 and are recognised in are subsequently measured at amortised cost using the effective the Balance Sheet at fair value. Gains and losses arising from interest method, except when they are the hedged item in an changes in fair value on derivatives that do not qualify for hedge effective fair value hedge relationship where the carrying value is accounting are taken directly to the Income Statement for the year. also adjusted to reflect the fair value movements associated with the hedged risks. Such fair value movements are recognised in the The Group uses a range of derivatives for both trading and to Income Statement. Amortised cost is calculated by taking into hedge exposures to financial risks, such as interest rate, foreign account any issue costs, discount or premium. exchange and energy price risks, arising in the normal course of business. The use of derivative financial instruments is governed by (e) Available-for-sale financial assets the Group’s policies approved by the Board of Directors. Further Available-for-sale financial assets are those non-derivative financial detail on the Group’s risk management policies is included within assets that are designated as available-for-sale, which are the Directors’ Report – Governance on pages 42 to 43 and in recognised initially at fair value within the Balance Sheet. Available- note 4 to the Financial Statements. for-sale financial assets are re-measured subsequently at fair value with gains and losses arising from changes in fair value recognised The accounting treatment for derivatives is dependent on whether directly in equity and presented in the Statement of they are entered into for trading or hedging purposes. A derivative Comprehensive Income, until the asset is disposed of or is instrument is considered to be used for hedging purposes when it determined to be impaired, at which time the cumulative gain or alters the risk profile of an underlying exposure of the Group in line loss previously recognised in equity is included in the Income with the Group’s risk management policies and is in accordance Statement for the year. Accrued interest or dividends arising on with established guidelines, which require the hedging relationship available-for-sale financial assets are recognised in the Income to be documented at its inception, ensure that the derivative is Statement. highly effective in achieving its objective, and require that its effectiveness can be reliably measured. The Group also holds At each balance sheet date the Group assesses whether there derivatives which are not designated as hedges and are held is objective evidence that available-for-sale financial assets are for trading. impaired. If any such evidence exists, cumulative losses recognised in equity are removed from equity and recognised All derivatives are recognised at fair value on the date on which the in profit and loss. The cumulative loss removed from equity derivative is entered into and are re-measured to fair value at each represents the difference between the acquisition cost and current reporting date. Derivatives are carried as assets when the fair value fair value, less any impairment loss on that financial asset is positive and as liabilities when the fair value is negative. previously recognised in profit or loss. Derivative assets and derivative liabilities are offset and presented on a net basis only when both a legal right of set-off exists and the Impairment losses recognised in the Income Statement for equity intention to net settle the derivative contracts is present. investments classified as available-for-sale are not subsequently reversed through the Income Statement. Impairment losses The Group enters into certain energy derivative contracts covering recognised in the Income Statement for debt instruments classified periods for which observable market data does not exist. The fair as available-for-sale are subsequently reversed if an increase in the value of such derivatives is estimated by reference in part to fair value of the instrument can be objectively related to an event published price quotations from active markets, to the extent that occurring after the recognition of the impairment loss. such observable market data exists, and in part by using valuation techniques, whose inputs include data which is not based on or (f) Financial assets at fair value through profit or loss derived from observable markets. Where the fair value at initial The Group holds investments in gilts which it designates as fair recognition for such contracts differs from the transaction price, value through profit or loss in order to reduce significantly a a fair value gain or fair value loss will arise. This is referred to as measurement inconsistency that would otherwise arise. a day-one gain or day-one loss. Such gains and losses are Investments are measured at fair value on initial recognition and deferred and amortised to the Income Statement based on are re-measured to fair value in each subsequent reporting period. volumes purchased or delivered over the contractual period until Gains and losses arising from changes in fair value are recognised such time observable market data becomes available. When in the Income Statement within interest income or interest observable market data becomes available, any remaining deferred expense. day-one gains or losses are recognised within the Income (g) Derivative financial instruments Statement. Recognition of the gains or losses resulting from The Group routinely enters into sale and purchase transactions changes in fair value depends on the purpose for issuing or holding for physical delivery of gas, power and oil. A portion of these the derivative. For derivatives that do not qualify for hedge transactions take the form of contracts that were entered into and accounting, any gains or losses arising from changes in fair value continue to be held for the purpose of receipt or delivery of the are taken directly to the Income Statement and are included within physical commodity in accordance with the Group’s expected gross profit or interest income and interest expense. Gains and sale, purchase or usage requirements, and are not within the losses arising on derivatives entered into for speculative energy scope of IAS 39. trading purposes are presented on a net basis within revenue.

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Net investment hedges: Hedges of net investments in foreign 2. Summary of significant accounting policies Review – Business Report Directors’ continued operations are accounted for similarly to cash flow hedges. Any gain or loss on the effective portion of the hedge is recognised in Embedded derivatives: Derivatives embedded in other financial equity, any gain or loss on the ineffective portion of the hedge is instruments or other host contracts are treated as separate recognised in the Income Statement. On disposal of the foreign derivatives when their risks and characteristics are not closely operation, the cumulative value of any gains or losses recognised related to those of the host contracts and the host contracts are directly in equity is transferred to the Income Statement. not carried at fair value, with gains or losses reported in the Income Statement. The closely-related nature of embedded derivatives is Nuclear activity reassessed when there is a change in the terms of the contract The Group’s investments in Lake Acquisitions Limited and NNB which significantly modifies the future cash flows under the Holding Company Limited are accounted for as associates. The contract. Where a contract contains one or more embedded following accounting policies are specific to the accounting for the derivatives, and providing that the embedded derivative nuclear activity of these associates. significantly modifies the cash flows under the contract, the option (a) Fuel costs – nuclear front end to fair value the entire contract may be taken and the contract will Front end fuel costs consist of the costs of procurement of be recognised at fair value with changes in fair value recognised in the Income Statement. uranium, conversion and enrichment services and fuel element – Governance Report Directors’ fabrication. All costs are capitalised into inventory and charged (h) Hedge accounting to the Income Statement in proportion to the amount of fuel burnt. For the purposes of hedge accounting, hedges are classified either (b) Fuel costs – nuclear back end as fair value hedges, cash flow hedges or hedges of net Advanced Gas-cooled Reactors (AGR) investments in foreign operations. Spent fuel extracted from the reactors is sent for reprocessing Fair value hedges: A derivative is classified as a fair value hedge and/or long-term storage and eventual disposal of resulting waste when it hedges the exposure to changes in the fair value of a products. Back end fuel costs comprise a loading related cost per recognised asset or liability. Any gain or loss from re-measuring the tonne of uranium and a rebate/surcharge to this cost dependent hedging instrument to fair value is recognised immediately in the on the out-turn market electricity price in the year and are Income Statement. Any gain or loss on the hedged item capitalised into inventory and charged to the Income Statement attributable to the hedged risk is adjusted against the carrying in proportion to the amount of fuel burnt. amount of the hedged item and recognised in the Income Pressurised Water Reactor (PWR) Statement. The Group discontinues fair value hedge accounting if Financial Statements Back end fuel costs are based on wet storage in station ponds the hedging instrument expires or is sold, terminated or exercised, followed by dry storage and subsequent direct disposal of fuel. the hedge no longer qualifies for hedge accounting or the Group Back end fuel costs are capitalised into inventory on loading and revokes the designation. Any adjustment to the carrying amount charged to the income statement in proportion to the amount of of a hedged financial instrument for which the effective interest fuel burnt. method is used is amortised to the Income Statement. Amortisation may begin as soon as an adjustment exists and shall (c) Nuclear property, plant and equipment and depreciation begin no later than when the hedged item ceases to be adjusted The depreciation period for the principal categories of nuclear for changes in its fair value attributable to the risk being hedged. assets, which are depreciated on a straight-line basis, are as

follows: Shareholder Information Cash flow hedges: A derivative is classified as a cash flow hedge when it hedges exposure to variability in cash flows that is AGR power stations 4 to 13 years attributable to a particular risk either associated with a recognised asset, liability or a highly probable forecast transaction. The portion PWR power station 25 years of the gain or loss on the hedging instrument which is effective is Expenditure on major inspection and overhauls of production plant recognised directly in equity while any ineffectiveness is recognised is depreciated over the period until the next outage which for AGR in the Income Statement. The gains or losses that are recognised power stations is two to three years and for the PWR power directly in equity are transferred to the Income Statement in the station is 18 months. same period in which the highly probable forecast transaction affects income, for example when the future sale of physical gas or (d) Nuclear Liabilities Fund (NLF) funding arrangements physical power actually occurs. Where the hedged item is the cost Under the arrangements in place with the Secretary of State, of a non-financial asset or liability, the amounts taken to equity are the NLF will fund, subject to certain exceptions, British Energy’s transferred to the initial carrying amount of the non-financial asset qualifying uncontracted nuclear liabilities and qualifying or liability on its recognition. Hedge accounting is discontinued decommissioning costs. when the hedging instrument expires or is sold, terminated or exercised without replacement or rollover, no longer qualifies for In part-consideration for the assumption of these liabilities by the hedge accounting or the Group revokes the designation. Secretary of State and the NLF, British Energy agreed to pay fixed decommissioning contributions each year and £150,000 (indexed At that point in time, any cumulative gain or loss on the hedging to RPI) for every tonne of uranium in PWR fuel loaded into the instrument recognised in equity remains in equity until the highly Sizewell B reactor after the date of these arrangements. probable forecast transaction occurs. If the transaction is no longer expected to occur, the cumulative gain or loss recognised in equity (e) NLF and nuclear liabilities receivables is recognised in the Income Statement. The Government indemnity is provided to indemnify any future shortfall on NLF funding of qualifying uncontracted nuclear liabilities (including PWR back end fuel services) and qualifying nuclear decommissioning costs such that the receivable equals the present value of the associated qualifying nuclear liabilities.

Centrica plc Annual Report and Accounts 2009 79

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2. Summary of significant accounting policies Finance lease – third-party power station tolling arrangement continued The Group has a long-term tolling arrangement with the Spalding power station. The contract provides Centrica with the right to (f) Nuclear liabilities nominate 100% of the plant output until 2021 in return for a mix Nuclear liabilities represent provision for British Energy’s liabilities in of capacity payments and operating payments based on plant respect of the costs of waste management of spent fuel and availability. Centrica holds an option to extend the tolling nuclear decommissioning. arrangement for a further eight years, exercisable by 30 September (g) Unburnt fuels at shutdown 2020. If extended, Centrica is granted an option to purchase the Due to the nature of the nuclear fuel process there will be station at the end of this further period. The Directors have judged quantities of unburnt fuel in the reactors at station closure. The that the arrangement should be accounted for as a finance lease costs relating to this unburnt fuel (final core) are estimated by as the lease term is judged to be a major part of the economic life applying a long-term inflation index to the projected costs, which of the power station and the present value of the minimum lease are then discounted. payments at inception date of the arrangement amounted to a large part of the fair value of the power station at that time. Details 3. Critical accounting judgements and key sources of the finance lease asset, finance lease creditor and interest of estimation uncertainty charges are included in notes 18, 26 and 10 respectively. (a) Critical judgements in applying the Group’s accounting Provision for onerous gas contract policies On 1 October 2009 an onerous contract provision was established The Group’s accounting policies as set out in note 2 and Notes to for a gas purchase contract for which a two-year notice had been the Financial Statements include descriptions of key judgements served to terminate (see notes 8 and 28). This contract provided management has made in applying the Group’s accounting the Group with the option to purchase gas for which a significant policies. Areas of judgement that have the most significant effect capacity charge was incurred regardless of the offtake. The on the amounts recognised in the Financial Statements (apart from capacity charges are unavoidable costs of the contract. The those involving estimations which are dealt with below) include the economic benefits expected to be received under the contract following: have been estimated using the Group’s standard contract valuation methodology. Management has judged that, following • the presentation of certain items as exceptional – notes 2 and 8; serving notice to terminate, this contract no longer forms part of • the use of adjusted profit and adjusted earnings per share the Group’s gas supply and that any gas delivered under the measures – notes 2 and 14; and contract is delivered to minimise the overall cost of the contract • the classification of energy procurement contracts as derivative during the notice period rather than to satisfy the Group’s overall financial instruments and presentation as certain re- demand for gas. Therefore the expected economic benefits have measurements – notes 2, 4, 8 and 22. been estimated based on market prices rather than being valued In addition to those described above, management has made the on a portfolio basis as explained in note 2. following key judgements in applying the Group’s accounting Business combinations and acquisitions – purchase price policies that have the most significant effect on the Group’s allocations Financial Statements. For business combinations and acquisitions of associates and joint Wind farm partial disposal – GLID Wind Farm TopCo Limited ventures, IFRS requires that a fair value exercise is undertaken The Group disposed of 50% of the equity voting share capital allocating the purchase price (cost) of acquiring controlling of GLID Wind Farms TopCo Limited (‘GLID’), the owner of Glens interests and interests in associates to the fair value of the of Foudland and Lynn and Inner Dowsing wind farms on acquired identifiable assets, liabilities and contingent liabilities. 11 December 2009 (see note 38). Any difference between the cost of acquiring the interest and the fair value of the acquired net assets, which includes identified As part of this disposal, the Group contracted to purchase 100% contingent liabilities, is recognised as acquired goodwill. The fair of the power output and 50% of the renewable obligation value exercise is performed at the date of acquisition. As a result certificates produced by these wind farms under a 15-year offtake of the nature of fair value assessments in the energy industry the agreement. The pricing of this arrangement was on an arm’s purchase price allocation exercise and acquisition-date fair value length basis. The Group also contracted to provide management determinations require subjective judgements based on a wide and transitional support services to GLID as directed by their board range of complex variables at a point in time. Management uses (and shareholders). A shareholders’ agreement was also put in all available information to make the fair value determinations. place which included a number of reserved matters and provides Business combinations are set out in note 37. for joint management of the major decisions of the company. EU Emissions Trading Scheme The Directors have judged that the disposal of equity voting share The Group has been subject to the EU Emissions Trading Scheme capital is a loss of control over the financial and operating policies (EU ETS) since 1 January 2005. IFRIC 3, Emission Rights was of GLID. The offtake agreement pricing together with the other withdrawn by the IASB in June 2005, and has not yet been arrangements in place mean that the majority of the benefits and replaced by definitive guidance. The Group has adopted an residual risks of owning the wind farms reside with GLID and not accounting policy which recognises CO2 emissions liabilities when Centrica. Accordingly, the remaining investment in GLID is equity the level of emissions exceeds the level of allowances granted by accounted as an investment in a joint venture (see note 19). The the Government in the period. The liability is measured at the cost Directors have judged also that the 15-year offtake agreement is of purchased allowances up to the level of purchased allowances not a leasing arrangement. This is because the Group is not held, and then at market price of allowances ruling at the balance purchasing substantially all of the economic output of the wind sheet date. Movements in the liability are reflected within operating farm. The contract is instead assessed as falling within the scope profit. Forward contracts for sales and purchases of allowances of IAS 39 and is being marked to market. are measured at fair value.

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Gas and liquids reserves

3. Critical accounting judgements and key sources Review – Business Report Directors’ of estimation uncertainty continued The volume of proven and probable gas and liquids reserves is an estimate that affects the unit of production depreciation of Petroleum revenue tax (PRT) producing gas and liquids property, plant and equipment as The definitions of an income tax in IAS 12, Income Taxes, have led well as being a significant estimate affecting decommissioning management to judge that PRT should be treated consistently with estimates and impairment calculations. The factors impacting other income taxes. The charge for the year is presented within gas and liquids estimates, the process for estimating reserve taxation on profit from continuing operations in the Income quantities and reserve recognition are described on page 159. Statement. Deferred amounts are included within deferred tax assets and liabilities in the Balance Sheet. The impact of a change in estimated proven and probable reserves is dealt with prospectively by depreciating the remaining book (b) Key sources of estimation uncertainty value of producing assets over the expected future production. The key assumptions concerning the future, and other key sources If proven and probable reserves estimates are revised downwards, of estimation uncertainty at the balance sheet date, that have a earnings could be affected by higher depreciation expense or an significant risk of causing a material adjustment to the carrying immediate write-down (impairment) of the asset’s book value. amounts of assets and liabilities within the next financial year,

are discussed below. Decommissioning costs – Governance Report Directors’ The estimated cost of decommissioning at the end of the Revenue recognition – unread gas and electricity meters producing lives of fields is reviewed periodically and is based on Revenue for energy supply activities includes an assessment of proven and probable reserves, price levels and technology at the energy supplied to customers between the date of the last meter balance sheet date. Provision is made for the estimated cost of reading and the year end (unread). Unread gas and electricity decommissioning at the balance sheet date. The payment dates comprises both billed and unbilled revenue. It is estimated through of total expected future decommissioning costs are uncertain and the billing systems, using historical consumption patterns, on a dependent on the lives of the facilities, but are currently anticipated customer by customer basis, taking into account weather patterns, to be between 2010 and 2050, with the substantial majority of the load forecasts and the differences between actual meter reads costs expected to be paid between 2015 and 2030. being returned and system estimates. Actual meter reads continue to be compared to system estimates between the balance sheet Provisions are determined for the estimated costs of date and the finalisation of the accounts. An assessment is also decommissioning British Energy’s nuclear power stations and the made of any factors that are likely to materially affect the ultimate costs of waste management and spent fuel. Various arrangements

economic benefits which will flow to the Group, including bill and indemnities are in place with the Secretary of State with Financial Statements cancellation and re-bill rates. To the extent that the economic respect to these costs, as explained in note 2. benefits are not expected to flow to the Group, the value of that revenue is not recognised. The judgements applied, and the Impairment of goodwill and indefinite-lived intangible assets assumptions underpinning these judgements, are considered The Group determines whether goodwill and indefinite-lived to be appropriate. However, a change in these assumptions intangible assets are impaired at least on an annual basis in would have an impact on the amount of revenue recognised. accordance with the Group’s accounting policy, as described in note 2. This requires the determination of the recoverable amount Industry reconciliation process – cost of sales of the cash-generating units to which goodwill and indefinite-lived Industry reconciliation procedures are required as differences arise intangibles are allocated. The recoverable amounts are determined Shareholder Information between the estimated quantity of gas and electricity the Group by either estimating the value in use of those cash-generating units deems to have supplied and billed customers, and the estimated or, in the case of the Upstream UK – Gas production and quantity industry system operators deem the individual suppliers, development cash-generating unit, determining the fair value less including the Group, to have supplied to customers. Difference in costs to sell of the cash-generating unit. Value in use calculations deemed supply is referred to as imbalance. The reconciliation require the Group to make an estimate of the expected future cash procedures can result in either a higher or lower value of industry flows to be derived from the cash-generating units and to choose deemed supply than has been estimated as being supplied to a suitable discount rate in order to calculate the present value of customers by the Group, but in practice tends to result in a higher those cash flows. The fair value less costs to sell methodology is value of deemed supply. The Group then reviews the difference to deemed more appropriate for the Upstream UK – Gas production ascertain whether there is evidence that its estimate of amounts and development cash-generating unit as it is based on post-tax supplied to customers is inaccurate or whether the difference cash flows arising from each field within the cash-generating unit, arises from other causes. The Group’s share of the resulting which is consistent with the approach taken by management in imbalance is included within commodity costs charged to cost of determining the economic value of the underlying assets. Fair value sales. Management estimates the level of recovery of imbalance less costs to sell is determined by discounting the post-tax cash which will be achieved either through subsequent customer billing flows expected to be generated by the gas production and or through developing industry settlement procedures. development assets within the Upstream UK – Gas production and development cash-generating unit, net of associated selling costs, Determination of fair values – energy derivatives and takes into account assumptions market participants would use Derivative contracts are carried in the Balance Sheet at fair value, in estimating fair value. Further detail on impairments arising and with changes in fair value recorded in either the Income Statement the assumptions used in determining the value in use and fair value or the Statement of Comprehensive Income. Fair values of energy less costs to sell calculations is provided in note 17. derivatives are estimated by reference in part to published price quotations in active markets and in part by using valuation techniques. More detail on the assumptions used in determining fair valuations is provided in note 29.

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3. Critical accounting judgements and key sources and losses are recognised in full in the period in which they occur. of estimation uncertainty continued The key assumptions used for the actuarial valuation are based on the Group’s best estimate of the variables that will determine the Impairment of power generation and upstream gas assets ultimate cost of providing post-employment benefits, on which Power generation and upstream gas assets are assessed for further detail is provided in note 36. indicators of impairment at each reporting date in accordance with the Group’s accounting policies as described in note 2. If an 4. Financial risk management indicator of impairment exists, an assessment of the recoverable The Group’s normal operating, investing and financing activities amount of the asset is required to be made. Indicators of expose it to a variety of financial risks: market risk (including impairment for these assets may include, but are not limited to, commodity price risk, volumetric risk, currency risk, interest rate the following: risk and equity price risk), credit risk and liquidity risk. The Group’s • reductions in reserve estimates or profiles of production; overall risk management process is designed to identify, manage • declines in long-term commodity prices; and mitigate business risk, which includes, among others, financial • increases in capital expenditure or acceleration of known capital risk. Further detail on the Group’s overall risk management expenditure; process is included within the Directors’ Report – Governance • significant unplanned outages or problems with operational on pages 42 to 43. performance; and During 2009, the markets continued to experience the volatility in • changes in regulatory or tax environments. commodity prices and shortage of available credit which was seen The recoverable amount of power generation and upstream gas in 2008. Many of the markets in which the Group operates have assets is assessed with reference to either each individual asset’s continued to experience economic contraction. Despite these value in use or fair value less costs to sell. The value in use is difficult market conditions, the Group continues to manage these based on the pre-tax cash flows expected to be generated by risks in accordance with its financial risk management processes. the asset and is dependent on views of forecast generation/ Financial risk management is overseen by the Group Financial Risk production, forecast commodity prices (using market prices where Management Committee (GFRMC) according to objectives, targets available and internal estimates for the remainder of the period) and policies set by the Board. Commodity price risk management and the timing and extent of capital expenditure. The fair value less is carried out in accordance with individual business unit financial costs to sell is determined by using evidence from recent risk management policies, as approved by the GFRMC and the acquisitions for similar assets in the local oil and gas market, or by Board. Treasury risk management, including management of discounting the post-tax cash flows expected to be generated, net currency risk, interest rate risk, equity price risk and liquidity risk of associated selling costs, taking into account assumptions is carried out by a central Group Treasury function in accordance market participants would use in estimating fair value. with the Group’s financing and treasury policy, as approved by For gas fired power stations, which have a high degree of the Board. The credit risks associated with commodity trading and production flexibility, the value in use calculation also includes a treasury positions are managed in accordance with the Group’s scenario-based statistical assessment of the additional value which counterparty credit policy. Downstream credit risk management can be generated from optimising production to take advantage of is carried out in accordance with individual business unit credit volatile forward prices. Pre-tax cash flows for the first three years policies. are based on the Group’s internal Board-approved three-year Market risk management business plans and thereafter are estimated on a consistent basis Market risk is the risk of loss that results from changes in market to reflect cash flows up to the date of cessation of operation of the prices (commodity prices, foreign exchange rates, interest rates asset. Pre-tax cash flows are discounted using an appropriate and equity prices). The level of market risk to which the Group is pre-tax discount rate which is derived from the Group’s weighted exposed at a point in time varies depending on market conditions, average cost of capital. Discount rates are based on current expectations of future price or market rate movements and the market assessments of the time value of money and are derived composition of the Group’s physical asset and contract portfolios. from the Group’s weighted average cost of capital. Risks specific to cash-generating units are reflected within cash flow forecasts. (a) Commodity price risk management Further details of impairments arising and the carrying values of the The Group is exposed to commodity price risk in its energy Group’s power generation and upstream gas assets are included procurement, downstream and proprietary energy trading within note 18. activities.

Trade and other receivables – provisions for credit losses (i) Energy procurement and downstream activities The methodology for determining provisions for credit losses on The Group’s energy procurement and downstream activities trade and other receivables and the level of such provisions are set consist of downstream positions, equity gas and liquids out in note 21. The estimates and assumptions used to determine production, equity power generation, bilateral procurement and the level of provisions are reviewed periodically. Although the sales contracts, market-traded purchase and sales contracts and provisions recognised are considered appropriate, the use of derivative positions taken on with the intent of securing gas and different assumptions or changes in economic conditions could power for the Group’s downstream customers in the UK, Europe lead to changes in the provisions and therefore impact profit or and North America from a variety of sources at an optimal cost. loss for the year. The Group actively manages commodity price risk by optimising its asset and contract portfolios and making use of volume flexibility. Pensions and other post-retirement benefits The Group operates a number of defined benefit pension The Group is exposed to commodity price risk in its energy schemes. The cost of providing benefits under the defined benefit procurement and downstream activities because the cost of schemes is determined separately for each scheme under the procuring gas and electricity to serve its downstream customers projected unit credit actuarial valuation method. Actuarial gains varies with wholesale commodity prices. The risk is primarily that

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The carrying value of energy contracts used in energy procurement

4. Financial risk management continued Review – Business Report Directors’ and downstream activities at 31 December 2009 is disclosed in market prices for commodities will fluctuate between the time that note 22. A sensitivity analysis that is intended to illustrate the sales prices are fixed or tariffs are set and the time at which the sensitivity of the Group’s financial position and performance to corresponding procurement cost is fixed, thereby potentially changes in the fair value or future cash flows of financial reducing expected margins or making sales unprofitable. instruments associated with the Group’s energy procurement and The Group is also exposed to volumetric risk in the form of an downstream activities as a result of changes in commodity prices, uncertain consumption profile arising from a range of factors, is provided below in section (e). including weather, energy consumption changes and economic (ii) Proprietary energy trading climate. The Group’s proprietary energy trading activities consist of physical The Group uses specific volumetric limits to manage the exposure and financial commodity purchases and sales contracts taken on to market prices associated with the Group’s energy procurement with the intent of benefiting in the short term from changes in and downstream activities to an acceptable level. Volumetric limits market prices or differences between buying and selling prices. are supported by Profit at Risk (PaR) and Value at Risk (VaR) The Group conducts its trading activities over the counter and methodologies in the UK and a VaR methodology in North America through exchanges in the UK, North America and continental and Europe to measure the Group’s exposure to commodity price Europe. The Group is exposed to commodity price risk as a result – Governance Report Directors’ risk. Limits are also set on PaR and VaR measurements as a of its proprietary energy trading activities because the value of its further control over exposure to market prices. PaR measures the trading assets and liabilities will fluctuate with changes in market estimated potential loss in a position or portfolio of positions prices for commodities. associated with the movement of a commodity price for a given The Group sets volumetric and VaR limits to manage the confidence level, over the remaining term of the position or commodity price risk exposure associated with the Group’s contract portfolio. VaR measures the estimated potential loss for a proprietary energy trading activities. The VaR used measures the given confidence level over a predetermined holding period. The estimated potential loss for a 95% confidence level over a one-day standard confidence level used is 95%. In addition, stress tests are holding period. The holding period used is based on market regularly performed to evaluate the impact of substantial liquidity and the number of days the Group would expect it to take movements in commodity prices. to close out a trading position.

The Group measures and manages the commodity price risk As with any modelled risk measure, there are certain limitations

associated with the Group’s entire energy procurement and that arise from the assumptions used in the VaR analysis. VaR Financial Statements downstream portfolio. Only certain of the Group’s energy assumes that the future will behave like the past and that the procurement and downstream contracts constitute financial Group’s trading positions can be unwound or hedged within the instruments under IAS 39 (note 2). As a result, while the Group predetermined holding period. Furthermore, the use of a 95% manages the commodity price risk associated with both financial confidence level, by definition, does not take into account changes and non-financial energy procurement and downstream contracts, in value that might occur beyond this confidence level. it is the notional value of energy contracts being carried at fair value that represents the exposure of the Group’s energy The VaR, before taxation, associated with the Group’s proprietary procurement and downstream activities to commodity price risk energy trading activities at 31 December 2009 was £2 million according to IFRS 7, Financial Instruments: Disclosures. This is (2008: £1 million). The carrying value of energy contracts used because energy contracts that are financial instruments under in proprietary energy trading activities at 31 December 2009 is Shareholder Information IAS 39 are accounted for on a fair value basis and changes in fair disclosed in note 22. value immediately impact profit or equity. Conversely, energy contracts that are not financial instruments under IAS 39 are (b) Currency risk management accounted for as executory contracts and changes in fair value The Group is exposed to currency risk on foreign currency do not immediately impact profit or equity, and as such, are not denominated forecast transactions, firm commitments, monetary exposed to commodity price risk as defined by IFRS 7. So whilst assets and liabilities (transactional exposure) and on its net the PaR or VaR associated with energy procurement and investments in foreign operations (translational exposure). downstream contracts outside the scope of IAS 39 is monitored (i) Transactional currency risk for internal risk management purposes, only those energy The Group is exposed to transactional currency risk on contracts within the scope of IAS 39 are within the scope of the transactions denominated in currencies other than the underlying IFRS 7 disclosure requirements. functional currency of the commercial operation transacting. The The net loss of £71 million (2008: loss of £1,331 million) on the Group’s primary functional currencies are pounds sterling in the re-measurement of energy contracts largely represents unrealised UK, Canadian dollars in Canada, US dollars in the US, Norwegian mark-to-market loss created by gas and power purchase kroner in Norway and euros in Europe. The risk is that the contracts which are priced above the current wholesale market functional currency value of cash flows will vary as a result of value of energy. This loss is calculated with reference to forward movements in exchange rates. Transactional exposure arises from energy prices and therefore the extent of the economic loss arising the Group’s energy procurement activities in the UK and in over the life of these contracts is uncertain, and entirely dependent Canada, where a proportion of transactions are denominated in upon the level of future wholesale energy prices. Generally, subject euros or US dollars and on certain capital commitments to short-term balancing, the ultimate net charge to cost of sales denominated in foreign currencies. In addition, in order to optimise will be consistent with the price of energy agreed in these the cost of funding, the Group has, in certain cases, issued foreign contracts and the fair value adjustments will reverse as the energy currency denominated debt, primarily in US dollars, New Zealand is supplied over the life of the contract. dollars, euros or Japanese yen.

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4. Financial risk management continued (e) Sensitivity analysis A financial instrument is defined in IAS 32 as any contract that It is the Group’s policy to hedge all material transactional gives rise to a financial asset of one entity (effectively the exposures using forward contracts to fix the functional currency contractual right to receive cash or another financial asset from value of non-functional currency cash flows. At 31 December another entity) and a financial liability (effectively the contractual 2009, there were no material unhedged non-functional currency obligation to deliver cash or another financial asset to another monetary assets or liabilities, firm commitments or probable entity) or equity instrument (effectively a residual interest in the forecast transactions (2008: £nil), other than foreign currency assets of an entity) of another. IFRS 7 requires disclosure of a borrowings used to hedge translational exposures. sensitivity analysis that is intended to illustrate the sensitivity of the (ii) Translational currency risk Group’s financial position and performance to changes in market The Group is exposed to translational currency risk as a result of variables (commodity prices, foreign exchange rates and interest its net investments in North America and Europe. The risk is that rates) as a result of changes in the fair value or cash flows the pounds sterling value of the net assets of foreign operations associated with the Group’s financial instruments. The sensitivity will decrease with changes in foreign exchange rates. The Group’s analysis provided discloses the effect on profit or loss and equity at policy is to protect the pounds sterling book value of its net 31 December 2009 assuming that a reasonably possible change in investments in foreign operations, subject to certain targets the relevant risk variable had occurred at 31 December 2009 and monitored by the GFRMC, by holding foreign currency debt, been applied to the risk exposures in existence at that date to entering into foreign currency derivatives, or a mixture of both. show the effects of reasonably possible changes in price on profit or loss and equity to the next annual reporting date. Reasonably During the year, the Group reviewed the existing translational possible changes in market variables used in the sensitivity currency risk management procedures. This review took into analysis are based on implied volatilities, where available, or consideration the cash impact of any hedging activity as well historical data for energy prices and foreign exchange rates. as the risk to the net asset numbers in the Group’s Financial Reasonably possible changes in interest rates are based on Statements. This resulted in a reduction in the overall proportion of management judgement and historical experience. net investments which are hedged for translational currency risk. The effect of this change is an increased risk of changes to the The sensitivity analysis has been prepared based on 31 December sterling value of net investments in foreign operations, which is 2009 balances and on the basis that the balances, the ratio of reported through reserves, but a reduced risk of cash flow volatility fixed to floating rates of debt and derivatives, the proportion of from rolling forward hedge transactions. energy contracts that are financial instruments, the proportion of financial instruments in foreign currencies and the hedge The Group measures and manages the currency risk associated designations in place at 31 December 2009 are all constant. with all transactional and translational exposures. In contrast, Excluded from this analysis are all non-financial assets and IFRS 7 requires disclosure of currency risk arising on financial liabilities and energy contracts that are not financial instruments instruments denominated in a currency other than the functional under IAS 39. The sensitivity to foreign exchange rates relates only currency of the commercial operation transacting only. As a result, to monetary assets and liabilities denominated in a currency other for the purposes of IFRS 7, currency risk excludes the Group’s net than the functional currency of the commercial operation investments in North America and Europe as well as foreign transacting, and excludes the translation of the net assets of currency denominated forecast transactions and firm foreign operations to pounds sterling, but includes the commitments. A sensitivity analysis that is intended to illustrate the corresponding impact of net investment hedges. sensitivity of the Group’s financial position and performance to changes in the fair value or future cash flows of foreign currency The sensitivity analysis provided is hypothetical only and should be denominated financial instruments as a result of changes in foreign used with caution as the impacts provided are not necessarily exchange rates is provided below in section (e). indicative of the actual impacts that would be experienced because the Group’s actual exposure to market rates is changing (c) Interest rate risk management constantly as the Group’s portfolio of commodity, debt and foreign In the normal course of business the Group borrows to finance its currency contracts changes. Changes in fair values or cash flows operations. The Group is exposed to interest rate risk because the based on a variation in a market variable cannot be extrapolated fair value of fixed rate borrowings and the cash flows associated because the relationship between the change in market variable with floating rate borrowings will fluctuate with changes in interest and the change in fair value or cash flows may not be linear. In rates. The Group’s policy is to manage the interest rate risk on addition, the effect of a change in a particular market variable on long-term borrowings by ensuring the exposure to floating interest fair values or cash flows is calculated without considering rates remains within a 30% to 70% range, including the impact of interrelationships between the various market rates or mitigating interest rate derivatives. A sensitivity analysis that is intended to actions that would be taken by the Group. The sensitivity analysis illustrate the sensitivity of the Group’s financial position and provided below excludes the impact of proprietary energy trading performance to changes in interest rates is provided below in assets and liabilities because the VaR associated with the Group’s section (e). proprietary energy trading activities has already been provided above in section (a). (d) Equity price risk management The Group is exposed to equity price risk because certain available-for-sale financial assets, held by the Law Debenture Trust on behalf of the Company as security in respect of the Centrica Unapproved Pension Scheme, are linked to equity indices (note 36). Investments in equity indices are inherently exposed to less risk than individual equity investments because they represent a naturally diverse portfolio. Note 36 details the Group’s other retirement benefit assets and liabilities.

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4. Financial risk management continued Review – Business Report Directors’ The impacts of reasonably possible changes in commodity prices on profit and equity, both after taxation, based on the assumptions provided above are as follows:

2009 2008

Reasonably Reasonably possible possible change change Energy prices Base price (i) in variable Base price (i) in variable UK gas (p/therm) 41 +/-10 56 +/-14 UK power (£/MWh) 41 +/-5 53 +/-9 UK coal (US$/tonne) 99 +/-20 93 +/-24 UK emissions (€/tonne) 13 +/-3 16 +/-4 UK oil (US$/bbl) 86 +/-19 58 +/-15 North American gas (USc/therm) 65 +/-11 70 +/-16 North American power (US$/MWh) 61 +/-5 60 +/-9 Directors’ Report – Governance Report Directors’ European power (€/MWh) 53 +/-5 64 +/-9

(i) The base price represents the average forward market price over the duration of the active market curve used in the sensitivity analysis provided.

2009 2008

Impact on Impact on Impact on Impact on profit equity profit equity Incremental profit/(loss) £m £m £m £m UK energy prices (combined) – increase/(decrease) 38/(38) 30/(30) 326/(322) 90/(90) North American energy prices (combined) – increase/(decrease) 46/(46) 21/(21) 25/(25) 27/(27) European energy prices (combined) – increase/(decrease) 14/(14) –/– 44/(44) –/–

The impacts of reasonably possible changes in interest rates on profit and equity, both after taxation, based on the assumptions provided above are as follows: Financial Statements

2009 2008

Reasonably Reasonably possible possible change Impact on Impact on change Impact on Impact on in variable profit equity in variable profit equity Interest rates and incremental profit/(loss) % £m £m % £m £m UK interest rates +/-1.0 5/(9) 16/(19) +/-1.0 16/(16) 19/(23) US interest rates +/-1.0 6/(7) (7)/9 +/-1.0 (2)/2 (12)/14 Canadian interest rates +/-1.0 4/(4) –/– +/-1.0 –/– –/–

Euro interest rates +/-1.0 (12)/12 –/– +/-1.0 3/(3) –/– Shareholder Information Japanese interest rates +/-1.0 –/– (13)/17 +/-1.0 –/– (17)/23 New Zealand interest rates +/-1.0 (2)/2 –/– +/-1.0 (2)/2 –/–

The impacts of reasonably possible changes in foreign currency rates relative to pounds sterling on profit and equity, both after taxation, based on the assumptions provided above are as follows:

2009 2008

Reasonably Reasonably possible possible Foreign exchange rates and incremental change Impact on Impact on change Impact on Impact on in variable profit equity in variable profit equity profit/(loss) % £m £m % £m £m US dollar +/-10 (43)/51 4/(2) +/-10 (46)/45 (12)/12 Canadian dollar +/-10 –/3 10/(10) +/-10 (3)/1 (31)/28 Danish krone +/-10 –/– 27/(33) +/-10 –/– –/– Euro +/-10 (3)/(8) 14/(9) +/-10 3/(2) (20)/17 Japanese yen +/-10 –/– 1/– +/-10 –/– 3/(2) New Zealand dollar +/-10 –/– –/– +/-10 (10)/10 –/– Norwegian krone +/-10 (1)/1 5/(6) +/-10 –/– (4)/3 Swiss franc +/-10 –/– 3/(3) +/-10 –/– –/–

Centrica plc Annual Report and Accounts 2009 85

CE7088_CentricaAR_p062-160_Financial.indd 85 8/3/10 11:38:20 Notes to the Financial Statements continued

4. Financial risk management continued In some cases, an ageing of receivables is monitored and used to manage the exposure to credit risk associated with both business Credit risk management and residential customers. In other cases, credit risk is monitored Credit risk is the risk of loss associated with a counterparty’s and managed by grouping customers according to method of inability or failure to discharge its obligations under a contract. payment or profile. The Group is exposed to credit risk in its treasury, trading, energy procurement and downstream activities. During 2009, there has Liquidity risk management and going concern been a continuing shortage of available credit in the market. In Liquidity risk is the risk that the Group is unable to meet its financial addition, many of the markets in which the Group operates are obligations as they fall due. The Group does experience significant experiencing economic contraction. As a result of these external movements in its liquidity position due primarily to the seasonal market factors, the Group is encountering an increase in credit risk nature of its business and margin cash arrangements associated compared with that experienced at the end of 2008. The Group with certain wholesale commodity contracts. To mitigate this risk has taken steps to tighten downstream credit policies, including the Group holds cash on deposit and maintains significant the tightening of credit scores in customer management committed facilities. The Group’s liquidity position has remained processes, whilst continuing to manage credit risk in accordance strong throughout 2009 despite movements in commodity prices. with financial risk management processes. At 31 December 2009, the Group’s continuing operations were Note 22 provides further detail of the Group’s exposure to credit holding £nil (2008: £43 million) of cash as collateral against risk on derivative financial instruments, note 21 provides detail of counterparty balances, and had pledged £631 million (2008: £669 the Group’s exposure to credit risk on trade and other receivables, million) of cash as collateral, principally under margin calls to cover note 24 provides detail of the Group’s exposure to credit risk on exposure to mark-to-market positions on derivative contracts, cash and cash equivalents and note 29 provides the carrying value representing a net cash outflow during the year of £79 million of all financial assets representing the Group’s maximum exposure (2008: £556 million outflow), write-offs of pledged balances of £nil to credit risk. (2008: £22 million), acquisition of cash collateral balances held of £nil (2008: £33 million) and exchange losses of £59 million (2008: (a) Treasury, trading and energy procurement activities £100 million gain). £15 million of cash collateral pledged was Counterparty credit exposures are monitored by individual transferred into assets held for sale (2008: £nil). Within assets held counterparty and by category of credit rating, and are subject to for sale was a net £26 million (2008: £nil) cash inflow of collateral approved limits. The majority of significant exposures are with and the closing collateral (held)/pledged was £(17) million/£6 million counterparties rated A-/A3 or better. The Group uses master (2008: £nil). Generally, cash paid or received as collateral is netting agreements to reduce credit risk and net settles payments interest-bearing and is free from any restriction over its use by with counterparties where net settlement provisions exist. In the holder. addition, the Group employs a variety of other methods to mitigate credit risk: margining, various forms of bank and parent company The Group has a number of treasury policies to monitor and guarantees and letters of credit. manage liquidity risk. Cash forecasts identifying the Group’s liquidity requirements are produced regularly and are stress-tested 100% of the Group’s credit risk associated with its treasury, for different scenarios, including, but not limited to, reasonably trading and energy procurement activities is with counterparties in possible increases or decreases in commodity prices and the related energy industries or with financial institutions. The Group potential cash implications of a credit rating downgrade. The measures and manages the credit risk associated with the Group’s Group seeks to ensure that sufficient financial headroom exists entire treasury, trading and energy procurement portfolio. In for at least a 12-month period to safeguard the Group’s ability to contrast, IFRS 7 defines credit risk as the risk that one party to continue as a going concern. It is the Group's policy to maintain a financial instrument will cause a financial loss for the other party committed facilities and/or available surplus cash resources of at by failing to discharge an obligation and requires disclosure of least £1,200 million, to raise at least 75% of its net debt (excluding information about the exposure to credit risk arising from financial non-recourse debt) in the long-term debt market and to maintain instruments only. Only certain of the Group’s energy procurement an average term to maturity in the recourse long-term debt contracts constitute financial instruments under IAS 39 (note 2). As portfolio greater than five years. a result, whilst the Group manages the credit risk associated with both financial and non-financial energy procurement contracts, it is At 31 December 2009, the Group held £1,294 million (2008: the carrying value of financial assets within the scope of IAS 39 £2,939 million) of cash and cash equivalents and had undrawn (note 29) that represents the maximum exposure to credit risk in committed credit facilities of £2,083 million (2008: £1,380 million). accordance with IFRS 7 because credit losses associated with 148% (2008: 683%) of the Group’s net debt has been raised in the contracts that are not recognised on the Balance Sheet will not long-term debt market and the average term to maturity of the be recognised as such in the Income Statement. long-term debt portfolio was 9.6 years (2008: 9.3 years).

(b) Downstream activities The relatively high level of available cash resources and undrawn In the case of business customers, credit risk is managed by committed bank borrowing facilities has enabled the Directors to checking a company’s creditworthiness and financial strength both conclude that the Group has sufficient headroom to continue as a before commencing trade and during the business relationship. going concern. The statement of going concern is included in the For residential customers, creditworthiness is ascertained normally Directors' Report – Governance, on page 43. before commencing trade by reviewing an appropriate mix of internal and external information to determine the payment Maturities of derivative financial liabilities, trade and other payables, mechanism required to reduce credit risk to an acceptable level. bank borrowings and provisions are provided in notes 22, 25, 26 Certain customers will only be accepted on a prepayment basis and 28, respectively. Details of commitments and contingencies or with a security deposit. are provided in note 39.

CE7088_CentricaAR_p062-160_Financial.indd 86 8/3/10 11:38:21

5. Capital management Review – Business Report Directors’ The Group’s objective when managing capital is to maintain a balance of debt and equity which maintains an optimal level of financial risk. It achieves this by maintaining a capital structure and credit rating which are appropriate for the underlying risk within the business operations. An additional factor to consider is that, in a number of areas in which the Group operates, the Group’s strong capital structure and good credit standing are important elements of the Group’s competitive position.

At 31 December 2009, the Group’s long-term credit rating was A3 stable outlook for Moody’s Investor Services Inc. (2008: A3 stable outlook) and A- stable outlook for Standard & Poor’s Rating Services (2008: A negative outlook). During 2009, Standard & Poor’s moved Centrica from A to A- due to the increased debt levels resulting from the investment in British Energy, as expected by Centrica. The Group monitors capital, using a medium-term view of three to five years, on the basis of a number of financial ratios generally used by industry and by the credit rating agencies. This includes monitoring gearing ratios, interest cover and cash flow to debt ratios. The Group’s capital structure is managed against these ratios as required to maintain strong credit ratings.

The Group is not subject to externally-imposed capital requirements but, as is common for most companies, the level of debt that can

be raised is restricted by the Company’s Articles of Association. Net debt is limited to the greater of £5 billion and a gearing ratio of three – Governance Report Directors’ times adjusted capital and reserves. This restriction can be amended or removed by the shareholders of the Company passing a special resolution. 6. Segmental analysis Centrica’s operating segments are those used internally by management to run the business and make decisions. Centrica’s operating segments are based on products and services provided in each geographical area. The operating segments are also the Group’s reportable segments. The types of products and services from which each reportable segment derives its revenues are:

Segment Description Downstream UK: Residential energy supply The supply of gas and electricity to residential customers in the UK

Residential services Installation, repair and maintenance of domestic central heating, plumbing and drains, Financial Statements gas appliances and kitchen appliances, including the provision of fixed-fee maintenance/breakdown service and insurance contracts in the UK Business energy supply and services The supply of gas and electricity and provision of energy-related services to business customers in the UK Upstream UK: Upstream gas and oil Production and processing of gas and oil and the development of new fields to grow reserves Power generation Generation and optimisation of power from gas, nuclear and wind sources Shareholder Information Industrial and commercial Management, optimisation and scheduling of wholesale and industrial gas sales and gas procurement contracts Proprietary energy trading Trading in physical and financial energy contracts Storage UK Gas storage in the UK North America: Residential energy supply The supply of gas and electricity to residential customers in North America Business energy supply The supply of gas, electricity and energy solutions to business customers in North America Residential and business services Installation and maintenance of Heating, Ventilation and Air Conditioning (HVAC) equipment, water heaters and the provision of breakdown services in North America Upstream and wholesale energy Gas production, power generation and procurement and trading activities in the North American wholesale energy markets

Centrica plc Annual Report and Accounts 2009 87

CE7088_CentricaAR_p062-160_Financial.indd 87 8/3/10 11:38:21 Notes to the Financial Statements continued

6. Segmental analysis continued The measure of profit used by the Centrica Executive Committee is adjusted operating profit. Adjusted operating profit is operating profit before exceptional items and certain re-measurements (refer to note 8), before additional depreciation resulting from any fair value uplifts on Strategic Investments (refer to notes 2 and 14) and including the results from joint ventures and associates which are included before interest and tax. All transactions between segments are on an arm’s length basis.

2008 (restated) Year ended 31 December 2009 (i),(ii)

Less inter- Less inter- segment segment Gross segment revenue Group Gross segment revenue Group revenue (iii),(iv) revenue revenue (iii),(iv) revenue (a) Revenue £m £m £m £m £m £m Continuing operations: Residential energy supply (i) 7,843 – 7,843 7,779 – 7,779 Residential services (ii) 1,406 – 1,406 1,347 – 1,347 Business energy supply and services 3,316 – 3,316 3,063 – 3,063 Downstream UK 12,565 – 12,565 12,189 – 12,189

Upstream gas and oil (iii) 1,240 (689) 551 1,784 (1,318) 466 Power generation (iii) 1,317 (167) 1,150 1,264 (595) 669 Industrial and commercial (i), (iii) 1,907 (555) 1,352 1,940 (486) 1,454 Proprietary energy trading (iii), (iv) 52 (11) 41 61 (12) 49 Upstream UK 4,516 (1,422) 3,094 5,049 (2,411) 2,638

Storage UK (iii) 266 (70) 196 280 (59) 221

Residential energy supply 2,644 – 2,644 2,652 – 2,652 Business energy supply 2,491 – 2,491 2,015 – 2,015 Residential and business services 406 – 406 375 – 375 Upstream and wholesale energy (iii) 656 (89) 567 873 (91) 782 North America (i) 6,197 (89) 6,108 5,915 (91) 5,824 23,544 (1,581) 21,963 23,433 (2,561) 20,872 Discontinued operations: European Energy (note 38) (i) 2,357 – 2,357 472 (1) 471

(i) Restated to present the European Energy segment, with the exception of the Group’s operations in Germany, as a discontinued operation, as explained in note 38. The revenues of the Group’s operations in Germany are reported within the Upstream UK – Industrial and commercial operations segment. Also restated to present the revenues of British Gas New Energy within Downstream UK – Residential energy supply and to split North America into four segments. (ii) Restated to reflect the change in British Gas Services Limited’s revenue recognition policy, as explained in note 2. (iii) Inter-segment revenue reflects the level of revenue generated on sales to other Group segments on an arm’s length basis. (iv) The external revenue presented for Proprietary energy trading comprises both realised (settled) and unrealised (fair value changes) from trading in physical and financial energy contracts. Inter-segment revenue arising in Proprietary energy trading represents the recharge of brokerage fees to other Group segments.

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6. Segmental analysis continued Review – Business Report Directors’

Year ended 31 December

2008 2009 (restated) (i), (ii) (b) Operating profit £m £m Continuing operations: Residential energy supply (i) 595 376 Residential services (ii) 233 193 Business energy supply and services 183 143 Downstream UK 1,011 712

Upstream gas and oil (iii) 444 1,164 Power generation (iii) 147 11 Industrial and commercial (i) (93) (331) Proprietary energy trading 27 37 Upstream UK 525 881 – Governance Report Directors’

Storage UK 168 195

Residential energy supply 94 137 Business energy supply 34 11 Residential and business services 18 16 Upstream and wholesale energy 7 51 North America (i) 153 215 Adjusted operating profit – segment operating profit before exceptional items, certain re-measurements and impact of fair value uplifts from Strategic Investments (iv) 1,857 2,003 Share of joint ventures/associates’ interest and taxation (11) (3) (v) Other (5) (8) Financial Statements Depreciation of fair value uplifts to property, plant and equipment – Venture (iii) (20) – Depreciation of fair value uplifts to property, plant and equipment (net of taxation) – associates – British Energy (iii) (7) – 1,814 1,992 Exceptional items (note 8) (vii) (568) – Certain re-measurements included within gross profit (note 8) (62) (1,331) Certain re-measurements of associates’ energy contracts (net of taxation) (note 8) (9) – Operating profit after exceptional items and certain re-measurements 1,175 661 Discontinued operations: Shareholder Information European Energy (note 38) (i), (vi), (vii) (8) (52)

(i) Restated to present the European Energy segment, with the exception of the Group’s operations in Germany, as a discontinued operation, as explained in note 38. The operating profit of the Group’s operations in Germany is reported within the Upstream UK – Industrial and commercial operations segment. Also restated to present the operating profit of British Gas New Energy within Downstream UK – Residential energy supply, to split North America into four segments and to include the operating profit of joint ventures and associates pre-interest and tax. (ii) Restated to reflect the change in British Gas Services Limited’s revenue recognition policy, as explained in note 2. (iii) See note 2 and note 14 for explanation of the depreciation on fair value uplifts to property, plant and equipment on acquiring Strategic Investments. (iv) Includes results of equity-accounted interests before interest, taxation, certain re-measurements and depreciation on fair value uplifts to property, plant and equipment on Strategic Investments. (v) Other comprises a £1 million loss (2008: £8 million loss) relating to Corporate Centre costs not recharged to segments and a £4 million loss (2008: £nil) relating to an inter-segment transaction between a Proprietary trading operation and a non-proprietary energy trading operation. (vi) Represents loss after taxation and before exceptional items and certain re-measurements attributable to equity holders of the parent. This is the measure of results of discontinued operations that is reported regularly to the Group’s Executive Committee. (vii) Exceptional impairment charges of £149 million (2008: £nil) for continuing operations and £24 million (2008: £67 million) for discontinued operations were recognised in 2009. The charges for continuing operations relate to Upstream UK – Upstream gas and oil (£44 million), Upstream UK – Power generation (£35 million), North America – Upstream and wholesale energy (£44 million), North America – Residential energy supply (£19 million) and North America – Residential and business services (£7 million). The charges for discontinued operations relate to Oxxio in The Netherlands.

Centrica plc Annual Report and Accounts 2009 89

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6. Segmental analysis continued

Share of results of joint ventures and associates Depreciation of property, Amortisation, write-downs and Year ended 31 December before interest and taxation plant and equipment (i) impairments of intangibles

2008 2008 2008 2009 restated (ii) 2009 restated (ii) 2009 restated (ii) (c) Included within adjusted operating profit £m £m £m £m £m £m Continuing operations: Residential energy supply (ii) – – 8 10 22 27 Residential services – – 12 13 10 5 Business energy supply and services – – 2 3 7 8 Downstream UK – – 22 26 39 40

Upstream gas and oil (i), (iii) – – 353 280 16 21 Power generation (i), (iii), (iv) 28 12 112 101 36 31 Industrial and commercial (ii) – – 1 1 6 2 Proprietary energy trading – – – – – – Upstream UK 28 12 466 382 58 54

Storage UK – – 23 22 – –

Residential energy supply – – 2 2 6 5 Business energy supply – – 1 2 3 1 Residential and business services – – 2 2 2 3 Upstream and wholesale energy – – 71 65 2 2 North America (ii) – – 76 71 13 11

Other (v) – – 12 12 15 12 28 12 599 513 125 117 Discontinued operations: European Energy (note 38) (ii) 2 3 25 2 17 12

(i) Depreciation of property, plant and equipment is stated before depreciation of fair value uplifts for Strategic Investments. (ii) Restated to present the European Energy segment, with the exception of the Group’s operations in Germany, as a discontinued operation as explained in note 38. The operating profit of the Group’s operations in Germany is reported within the Industrial and commercial operations segment. Also restated to present the operating profit of British Gas New Energy within Residential energy supply, to split North America into four segments and to include the operating profit of joint ventures and associates pre interest and taxation. (iii) During 2009, impairment charges of £35 million (2008: £31 million) were incurred in the Power generation segment relating to emissions allowances and £16 million (2008: £21 million) in the Upstream gas and oil segment relating to exploration and evaluation assets, as described in note 17. (iv) Share of results of joint ventures and associates is before interest, certain re-measurements, depreciation of fair value uplifts to property, plant and equipment on Strategic Investments and taxation. (v) Other comprises depreciation of property, plant and equipment and amortisation and write-downs of intangibles on Corporate Centre assets which are charged out to other Group segments.

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6. Segmental analysis continued Review – Business Report Directors’

Average capital employed Segment assets Segment liabilities Net segment assets/(liabilities) Year ended 31 December 31 December (restated) (i), (ii), (iii) (restated) (i), (ii), (iii) (restated) (i), (ii), (iii) (restated) (i), (ii), (iii)

2009 2008 2009 2008 2009 2008 2009 2008 (d) Assets and liabilities £m £m £m £m £m £m £m £m

Residential energy supply (i) 1,351 1,597 (1,398) (1,281) (47) 316 492 401 Residential services (i), (ii) 264 288 (237) (216) 27 72 53 76 Business energy supply and services (i) 1,040 1,111 (548) (562) 492 549 567 506 Downstream UK 2,655 2,996 (2,183) (2,059) 472 937 1,112 983

Upstream gas and oil (i), (ii) 4,935 2,141 (2,633) (1,541) 2,302 600 484 119 Power generation (i) 4,029 2,221 (283) (363) 3,746 1,858 1,750 1,334 Industrial and commercial (i) 469 327 (231) (212) 238 115 33 (163) Directors’ Report – Governance Report Directors’ Proprietary energy trading (i) 843 1,074 (644) (879) 199 195 218 (259) Upstream UK 10,276 5,763 (3,791) (2,995) 6,485 2,768 2,485 1,031

Storage UK (i), (ii) 702 635 (343) (381) 359 254 191 198

Residential energy supply (i) 1,141 1,160 (351) (360) 790 800 1,010 795 Business energy supply (i) 640 1,235 (263) (346) 377 889 535 336 Residential and business services (i) 319 355 (51) (80) 268 275 270 229 Upstream and wholesale energy (i) 888 975 (280) (256) 608 719 563 520 North America (i) 2,988 3,725 (945) (1,042) 2,043 2,683 2,378 1,880 16,621 13,119 (7,262) (6,477) 9,359 6,642 6,166 4,092

Deferred tax assets/(liabilities) (i), (iv) 391 184 332 368 723 552 Financial Statements Derivative financial instruments held for energy procurement (i) 594 1,710 (2,670) (3,880) (2,076) (2,170) Treasury derivatives 131 197 (76) (314) 55 (117) Current tax (liabilities)/assets (i), (iv) (325) (271) 244 168 (81) (103) Short-term deposits and securities 1,423 2,950 – – 1,423 2,950 Assets/(liabilities) of disposal groups (v) 478 – (350) – 128 – European Energy (iii) – 599 – (186) – 413 Bank overdrafts and loans – – (4,680) (3,548) (4,680) (3,548) Shareholder Information Retirement benefit assets/(obligations) – 73 (565) (186) (565) (113) Corporate centre assets/(liabilities) 268 166 (299) (300) (31) (134) Non-operating assets/(liabilities) 2,960 5,608 (8,064) (7,878) (5,104) (2,270) 19,581 18,727 (15,326) (14,355) 4,255 4,372 Less inter-segment (receivables)/payables (139) (261) 139 261 – – 19,442 18,466 (15,187) (14,094) 4,255 4,372

(i) Restated to exclude segmental analysis of derivative assets and liabilities associated with certain re-measurements and to classify the non-current portions of derivative financial instruments from current assets and liabilities to non-current assets and liabilities, as explained in note 2. Restated to present the assets and liabilities of British Gas New Energy within Downstream UK – Residential energy supply and to split North America into four segments. Also restated to present the deferred and current tax assets and liabilities attributable to each operating segment. (ii) Restated to capitalise borrowing costs on adoption of IAS 23 (Amendment) and to reflect the change in British Gas Services Limited’s revenue recognition policy, as explained in note 2. (iii) Segment assets and liabilities include allocated current and deferred tax balances. (iv) Includes tax allocated to non-operating assets/(liabilities) and inter-segment offsets of tax assets and liabilities, as permitted by IAS 12. (v) Assets and liabilities of disposal groups are classified as held for sale, as explained in note 38. Prior period balances for discontinued operations were reported as European Energy. The assets and liabilities of the Group’s operations in Germany, which were previously also included within European Energy, are reported within the Upstream UK – Industrial and commercial operations segment.

Centrica plc Annual Report and Accounts 2009 91

CE7088_CentricaAR_p062-160_Financial.indd 91 8/3/10 11:38:22 Notes to the Financial Statements continued

6. Segmental analysis continued Capital employed represents the investment required to operate each of the Group’s segments. Capital employed is used by the Group to calculate the return on capital employed for each of the Group’s segments as part of the Group’s managing for value concept. Additional value is created when the return on capital employed exceeds the cost of capital. Net segment assets of the Group can be reconciled to the Group’s capital employed as follows:

2008 2009 (restated) (i), (ii) £m £m Net segment assets at 31 December (i), (ii) 9,359 6,642 Deduct: Intra-Group balances 46 (22) Derivative financial instruments held for proprietary energy trading or treasury management (i) (79) (113) Pre-productive assets (1,729) (826) Cash at bank, in transit and in hand (92) (83) Effect of averaging month-end balances (1,339) (1,506) Average capital employed for year ended 31 December 6,166 4,092

(i) Restated to exclude segmental analysis of derivative assets and liabilities associated with certain re-measurements, as explained in note 2. (ii) Restated to capitalise borrowing costs on adoption of IAS 23 (Amendment) and to reflect the change in British Gas Services Limited’s revenue recognition policy, as explained in note 2.

Capital expenditure on Capital expenditure on property, plant and intangible assets other Year ended 31 December equipment (note 18) than goodwill (note 16)

2008 2008 2009 (restated) (i),(ii) 2009 (restated) (ii) (e) Capital expenditure £m £m £m £m Continuing operations: Residential energy supply (ii) 1 15 60 14 Residential services 34 16 6 – Business energy supply and services 1 1 5 6 Downstream UK 36 32 71 20

Upstream gas and oil (i) 358 177 50 12 Power generation 139 299 275 264 Industrial and commercial (ii) 4 – 16 4 Proprietary energy trading – – – – Upstream UK 501 476 341 280

Storage UK (i) 60 24 – 2

Residential energy supply – 1 6 3 Business energy supply 1 1 6 – Residential and business services 1 1 – 2 Upstream and wholesale energy 52 78 2 7 North America (ii) 54 81 14 12 Other 3 18 38 10 Capital expenditure on continuing operations 654 631 464 324 Decrease in prepayments related to capital expenditure (2) (24) – – Unrealised gains on cash flow hedges transferred from reserves 4 – – – Capitalised interest (34) (9) – – (Increase)/decrease in trade payables related to capital expenditure (28) 19 140 (155) Net cash outflow 594 617 604 169

(i) Restated to capitalise borrowing costs on adoption of IAS 23 (Amendment), as explained in note 2. (ii) Restated to exclude the European Energy segment, with the exception of the Group’s operations in Germany, from continuing operations, as explained in note 38. The capital expenditure of the Group’s operations in Germany are reported within the Industrial and commercial segment. Also restated to present the capital expenditure of British Gas New Energy within Downstream UK – Residential energy supply and to split North America into four segments.

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6. Segmental analysis continued Review – Business Report Directors’ The Group operates in four main geographical areas:

Non-current assets Revenue (based on location of assets) Year ended 31 December (based on location of customer) At 31 December (i)

2008 2009 (restated) (ii) 2009 2008 £m £m £m £m Continuing operations: UK 15,216 14,610 9,050 4,770 United States of America 3,946 3,626 1,126 817 Canada 2,162 2,198 686 1,081 Rest of World 639 438 441 532 21,963 20,872 11,303 7,200

(i) Non-current assets exclude financial instruments, deferred tax assets and post-employment benefit assets. – Governance Report Directors’ (ii) Restated to present the European Energy segment, with the exception of the Group’s operations in Germany, as a discontinued operation, as explained in note 38, and change in British Gas Services Limited’s revenue recognition policy, as explained in note 2.

7. Costs of continuing operations

2008 2009 (restated) (i) Analysis of costs by nature £m £m Transportation, distribution and metering costs (3,503) (2,993) Commodity costs (12,036) (11,796) Depreciation, amortisation and write-downs (590) (451) Employee costs (492) (451) Other direct costs relating to the upstream businesses (289) (265) Other direct costs relating to the downstream businesses (753) (708) Financial Statements Total cost of sales before exceptional items and certain re-measurements (17,663) (16,664) Exceptional items and certain re-measurements (note 8) (455) (1,331) Total cost of sales (18,118) (17,995)

Depreciation, amortisation and write-downs (155) (180) Employee costs (942) (913) Exploration costs expensed (28) – Impairment of trade receivables (note 21) (354) (235) Foreign exchange (losses)/gains (2) 1 Shareholder Information Other costs associated with upstream businesses (151) (133) Other costs associated with downstream businesses (864) (765) Total operating costs before exceptional items and certain re-measurements (2,496) (2,225) Exceptional items and certain re-measurements (note 8) (175) – Total operating costs (2,671) (2,225)

(i) Restated to present the European Energy segment, with the exception of the Group’s operations in Germany, as a discontinued operation as explained in note 38.

Centrica plc Annual Report and Accounts 2009 93

CE7088_CentricaAR_p062-160_Financial.indd 93 8/3/10 11:38:23 Notes to the Financial Statements continued

8. Exceptional items and certain re-measurements

2009 2008 (restated) (i) (a) Exceptional items for the year ended 31 December £m £m Continuing operations: Provision for onerous gas procurement contract (ii) (199) – Termination of energy sales contract (iii) (139) – Provision for North American wind power purchase agreements (iv) (55) – Exceptional items from continuing operations included within gross profit (393) – Impairments: (v) Impairment of exploration and production assets arising from declining commodity prices (114) – Impairment of North American assets arising from changing market conditions (35) – (149) – UK restructuring costs (vi) (75) – Profit on disposal of wind farm equity (vii) 49 – (175) – Exceptional items from continuing operations included within Group operating profit (568) – Taxation on exceptional items 186 – Net exceptional items from continuing operations after taxation (382) – Discontinued operations: Impairment of Oxxio goodwill and other assets, provisions and write-offs after taxation (viii) (24) (67) Profit on disposal of Segebel S.A. after taxation (ix) 297 – Total exceptional items after taxation (109) (67)

2009 2008 (restated) (i) (b) Certain re-measurements for the year ended 31 December £m £m Continuing operations: Certain re-measurements recognised in relation to energy contracts Net gains arising on delivery of contracts (x) 928 10 Net losses arising on market price movements and new contracts (xi) (1,097) (1,337) Net losses arising on positions in relation to cross-border transportation or capacity contracts (xii) (28) (4) Reversal of certain re-measurements in relation to the termination of energy sales contracts (iii) 135 – Net re-measurements from continuing operations included within gross profit (62) (1,331) Net losses arising on re-measurement of associates’ energy contracts (net of taxation) (xiii) (9) – Net re-measurements included within Group operating profit (71) (1,331) Taxation on certain re-measurements (1) 413 Net re-measurements from continuing operations after taxation (72) (918) Discontinued operations: Net re-measurements on energy contracts of discontinued operations after taxation (note 38) (107) (63) Total re-measurements after taxation (179) (981)

(i) Restated to present the European Energy segment, with the exception of the Group’s operations in Germany, as a discontinued operation as explained in note 38. (ii) On 1 October 2009 an onerous contract provision was established in the Upstream UK – Industrial and commercial segment for a gas procurement contract for which a two-year notice had been served to terminate. Exceptional charges of £199 million have been incurred of which £160 million is included in provisions for other liabilities and charges at the balance sheet date (see note 28). (iii) During 2009, an exceptional charge of £139 million was recognised in relation to the termination of an out-of-the-money energy sales contract in the Industrial and commercial segment of Upstream UK with a negative fair value of £135 million that was reversed on termination. (iv) During 2009, an exceptional charge of £55 million was recognised in relation to wind power purchase agreements in the North America – Upstream and wholesale energy segment to reflect the fair value of the obligation to purchase power above its net realisable value. (v) Impairment charges have been recognised across upstream exploration, production and generation assets as a result of declining commodity prices and in North America as a result of economic conditions. See notes 6, 16 and 18. (vi) Restructuring costs, including costs of £23 million associated with the impairment of obsolete assets, have been charged in the UK as a result of the integration of the Downstream UK business and the acquisition of Venture Production plc to the Upstream UK – Upstream gas and oil segment. (vii) Disposal of 50% of the issued share capital of GLID Wind Farms TopCo Limited within the Upstream UK – Power generation segment, as explained in note 38. (viii) During 2009, exceptional charges were incurred in respect of the write-off of previously capitalised customer acquisition costs which are now considered to be irrecoverable. During 2008, exceptional charges of £67 million were incurred in the European Energy segment, including a £45 million impairment of the Oxxio goodwill, and a £22 million impairment of a receivable balance in Oxxio relating to historic overpayments of regulatory energy revenue tax, reflecting the reduced likelihood of realising the balance in the future. (ix) Disposal of 100% of the issued share capital of Segebel S.A., as explained in note 38. (x) As energy is delivered or consumed from previously contracted positions, the related fair value recognised in the opening balance sheet (representing the discounted difference between forward energy prices at the opening balance sheet date and the contract price of energy to be delivered) is charged or credited to the Income Statement. (xi) Represents fair value losses arising from the change in fair value of future contracted sales and purchase contracts as a result of changes in forward energy prices between reporting dates (or date of inception and the reporting date, where later). (xii) Comprises movements in fair value arising on proprietary trades in relation to cross-border transportation or storage capacity, on which economic value has been created which is not wholly accounted for under the provisions of IAS 39. (xiii) Includes fair value unwinds relating to the recognition of energy procurement contracts and energy sales contracts at their acquisition-date fair values.

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9. Directors and employees Review – Business Report Directors’

2008 (restated) 2009 (ii) (i) (a) Employee costs £m £m Wages and salaries 1,223 1,139 Social security costs 103 87 Other pension and retirement benefits costs 77 109 Share scheme costs 38 35 1,441 1,370 Capitalised employee costs (7) (6) Employee costs recognised in the Group Income Statement 1,434 1,364

(i) Details of Directors’ remuneration, share-based payments and pension entitlements in the Remuneration Report on pages 45 to 59 form part of these Financial Statements. Details of employee share- based payments are given in note 35. Details of the remuneration of key management personnel are given in note 40. (ii) Restated to present the European Energy segment, with the exception of the Group’s operations in Germany, as a discontinued operation, as explained in note 38.

2009 2008 (b) Average number of employees during the year Number Number – Governance Report Directors’ Downstream UK 26,216 26,195 Upstream UK 1,341 1,195 Storage UK 224 199 North America 5,042 4,991 Other operations (i), (ii) 1,302 237 34,125 32,817

UK 27,674 27,538 United States of America 2,706 2,533 Canada 2,336 2,458 Rest of World (i), (ii) 1,409 288 Financial Statements 34,125 32,817

(i) Includes 1,302 employees (2008: 237 employees) of European businesses which are classified as discontinued operations (note 38). (ii) 2009 number includes average employee numbers of Segebel S.A. from the date of consolidation (20 January 2009) up to the date of disposal (26 November 2009).

10. Net interest

2009 2008 (restated) (i) Interest Interest Interest Interest expense income Total expense income Total Year ended 31 December £m £m £m £m £m £m

Continuing operations: Shareholder Information Cost of servicing net debt Interest income – 48 48 – 106 106 Interest expense on bonds, bank loans and overdrafts (253) – (253) (128) – (128) Interest expense on finance leases (22) – (22) (23) – (23) (275) 48 (227) (151) 106 (45) (Losses)/gains on revaluation (Losses)/gains on fair value hedges (41) 43 2 (82) 81 (1) Fair value (losses)/gains on other derivatives (ii) (52) 175 123 (396) 47 (349) Fair value gains on other securities measured at fair value – 3 3 – – – Net foreign exchange translation of monetary assets and liabilities (iii) (128) – (128) – 345 345 (221) 221 – (478) 473 (5) Other interest Notional interest arising on discounted items (24) 29 5 (20) 59 39 Interest on cash collateral balances – 4 4 (20) 5 (15) Interest on supplier early payment arrangements – 5 5 – 15 15 (24) 38 14 (40) 79 39 (520) 307 (213) (669) 658 (11) Capitalised borrowing costs (i), (iv) 34 – 34 9 – 9 Interest (expense)/income (486) 307 (179) (660) 658 (2)

(i) Restated to capitalise borrowing costs on adoption of IAS 23 (Amendment), as explained in note 2. (ii) Primarily reflects changes in the fair value of derivatives used to hedge the foreign exchange exposure associated with inter-company loans denominated in foreign currencies. (iii) Primarily reflects foreign exchange (losses)/gains on inter-company loans denominated in foreign currencies. (iv) Borrowing costs on qualifying assets have been capitalised using an average rate of 5.37% (2008: 6.27%). Centrica plc Annual Report and Accounts 2009 95

CE7088_CentricaAR_p062-160_Financial.indd 95 8/3/10 11:38:24 Notes to the Financial Statements continued

11. Taxation

2008 2009 (restated) (i)

Exceptional items Exceptional items Business and certain Results for Business and certain Results for performance re-measurements the year performance re-measurements the year (a) Analysis of tax charge for the year £m £m £m £m £m £m The tax charge comprises: Current tax UK corporation tax 333 (62) 271 397 5 402 UK petroleum revenue tax 112 – 112 517 – 517 Foreign tax 30 (4) 26 25 2 27 Adjustments in respect of prior years (135) (4) (139) (21) – (21) Total current tax 340 (70) 270 918 7 925 Deferred tax Current year (ii) 147 (113) 34 165 (236) (71) Adjustments in respect of prior years 80 7 87 (8) – (8) Change in tax rates (iii) – – – (1) – (1) UK petroleum revenue tax (25) – (25) (52) – (52) Foreign deferred tax (11) (9) (20) 4 (184) (180) Total deferred tax 191 (115) 76 108 (420) (312) Total tax on profit from continuing operations (iv) 531 (185) 346 1,026 (413) 613

(i) Restated to present the European Energy segment, with the exception of the Group’s operations in Germany, as a discontinued operation as explained in note 38. (ii) The Finance Act 2008 changed the rules concerning loss relief on decommissioning costs and, as a result of this change, the prior year deferred tax charge is stated net of a £55 million credit in respect of previously unrecognised deferred tax assets. (iii) The effect of the decrease of 2% to the standard rate of UK corporation tax from 1 April 2008 on the relevant temporary differences at 31 December 2008 was a credit of £1 million. (iv) Total tax on profit from continuing operations excludes taxation on the Group’s share of profits in joint ventures and associates. Tax on items taken directly to equity is disclosed in notes 31 and 32. The Group earns its profits primarily in the UK, therefore the tax rate used for tax on profit from ordinary activities is the standard rate for UK corporation tax, which was 28% for 2009 (2008: 28.5%), with the exception of upstream profits, which were taxed at a UK corporation tax rate of 30% (2008: 30%) plus a supplementary charge at 20% (2008: 20%). Certain upstream assets also bear petroleum revenue tax at 50% (2008: 50%). Taxation for other jurisdictions is calculated at the rates prevailing in those respective jurisdictions.

(b) Factors affecting the tax charge for the year The differences between the total tax shown above and the amount calculated by applying the standard rate of UK corporation tax to the profit before tax is as follows:

2008 2009 (restated) (i)

Exceptional items Exceptional items Business and certain Results for Business and certain Results for performance re-measurements the year performance re-measurements the year £m £m £m £m £m £m Profit from continuing operations before tax 1,635 (639) 996 1,990 (1,331) 659 Less: share of profits in joint ventures and associates, net of interest and taxation (10) 9 (1) (9) – (9) Group profit from continuing operations before tax 1,625 (630) 995 1,981 (1,331) 650 Tax on profit from continuing operations at standard UK corporation tax rate of 28% (2008: 28.5%) 455 (176) 279 564 (379) 185 Effects of: Net expenses not deductible for tax purposes 32 (9) 23 44 2 46 Adjustments in respect of prior years (55) 3 (52) (29) – (29) Movement in unrecognised deferred tax assets (ii) 3 – 3 (43) – (43) UK petroleum revenue tax rates 60 – 60 335 – 335 Overseas tax rates (1) 8 7 (10) (50) (60) Additional charges applicable to upstream profits 37 (11) 26 166 10 176 Changes to tax rates – – – (1) 4 3 Taxation on profit from continuing operations 531 (185) 346 1,026 (413) 613

(i) Restated to present the European Energy segment, with the exception of the Group’s operations in Germany, as a discontinued operation as explained in note 38. (ii) The movement in unrecognised deferred tax assets includes the recognition in 2008 of £55 million of deferred tax assets relating to certain decommissioning provisions, following changes to UK tax law, and non-recognition of losses in certain overseas subsidiaries.

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11. Taxation continued Review – Business Report Directors’ (c) Factors that may affect future tax charges Production of gas and oil within the UK continental shelf is subject to several taxes: corporation tax at 30% (2008: 30%) on profits of gas and oil production; supplementary charge at 20% (2008: 20%) on profits of gas and oil production (adjusted for financing costs); petroleum revenue tax (PRT) at 50% (2008: 50%) on income generated from certain gas and oil production (net of certain costs).

PRT is a deductible expense for the purposes of corporation tax and the supplementary charge. The effective rate of tax suffered on profits of UK gas production therefore falls between 50% and 75%. To the extent that the Group’s profits are earned from UK oil and gas production, its effective tax rate will remain above the current UK statutory rate of 28% (2008: 28%).

Income earned in North America and other territories outside the UK is generally subject to higher effective rates of tax than the current UK statutory rate. In the medium term, the Group’s effective tax rate is expected to remain above the UK statutory rate. 12. Dividends

2009 2008 £m £m Directors’ Report – Governance Report Directors’ Prior year final dividend of 8.73 pence (2008: 8.59 pence) per ordinary share 447 356 Interim dividend of 3.66 pence (2008: 3.47 pence) per ordinary share 188 144 635 500

The prior year final dividend was paid on 10 June 2009 (2008: 11 June). The interim dividend was paid on 11 November 2009 (2008: 12 November). The Directors propose a final dividend of 9.14 pence per ordinary share (totalling £470 million) for the year ended 31 December 2009. The dividend will be submitted for formal approval at the Annual General Meeting to be held on 10 May 2010 and, subject to approval, will be paid on 16 June 2010 to those shareholders registered on 30 April 2010. 13. Auditors’ remuneration

2009 2008 £m £m Financial Statements Fees payable to the Company’s auditors for the audit of the Company’s annual accounts and Group consolidation 2.7 2.2 The auditing of other accounts within the Group pursuant to legislation (including that of countries and territories outside the UK) 3.4 1.3 Total fees related to audit of parent and subsidiary entities (i) 6.1 3.5 Fees payable to the Company’s auditors and its associates for other services: Other services pursuant to legislation (ii) 0.7 0.9 Services related to taxation 0.1 – Services related to information technology 0.1 0.2 Shareholder Information Services related to corporate finance transactions entered into or proposed to be entered into by or on behalf of the Company or any of its associates 0.3 0.4 All other services 1.5 0.8 8.8 5.8 Fees in respect of pension schemes: Audit 0.1 0.1

(i) Audit fees have increased in 2009 primarily as a result of work performed on Strategic Investments and the acquisition and subsequent disposal of Segebel S.A. The 2009 audit fees include a non- recurring element attributable largely to fair value assessments and audit work undertaken in support of disposals. (ii) Includes fees in respect of review performed on the Interim Financial Statements.

It is the Group’s policy to seek competitive tenders for all major consultancy and advisory projects. Appointments are made taking into account factors including expertise, experience and cost. In addition, the Board has approved a detailed policy defining the types of work for which the auditors can tender and the approvals required. In the past, the auditors have been engaged on assignments in addition to their statutory audit duties where their expertise and experience with the Group are particularly important, including tax advice, due diligence reporting and reporting accountant services on acquisitions.

Centrica plc Annual Report and Accounts 2009 97

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14. Earnings per ordinary share Basic earnings per ordinary share has been calculated by dividing the earnings attributable to equity holders of the Company for the year of £844 million (2008: loss of £137 million) by the weighted average number of ordinary shares in issue during the year of 5,121 million (2008: 4,198 million). The Directors believe that the presentation of adjusted basic earnings per ordinary share, being the basic earnings per ordinary share adjusted for certain re-measurements, exceptional items and the impact of Strategic Investments, assists with understanding the underlying performance of the Group, as explained in note 2. The reconciliation of basic to adjusted basic earnings per ordinary share is as follows:

Year ended 31 December 2009 2008 (restated) (i)

Pence per Pence per ordinary ordinary (a) Continuing and discontinued operations £m share £m share Earnings/(loss) – basic 844 16.5 (137) (3.3) Net exceptional items after taxation (notes 2 and 8) 109 2.1 67 1.6 Certain re-measurement losses after taxation (notes 2 and 8) (ii) 141 2.8 981 23.4 Depreciation of fair value uplifts to property, plant and equipment from Strategic Investments, after taxation 17 0.3 – – Earnings – adjusted basic 1,111 21.7 911 21.7

Earnings/(loss) – diluted 844 16.4 (137) (3.3)

Earnings – adjusted diluted 1,111 21.6 911 21.5

Venture The Group obtained a controlling interest in the Venture Group on 27 August 2009. The fair values attributable to the acquired assets, liabilities and contingent liabilities arising on acquisition are set out in note 37. Fair value adjustments amounting to £651 million have been made to interests acquired in oil and gas fields to report these at their acquisition-date fair values amounting to £1,748 million (included within property, plant and equipment). The fair value adjustments are provisional as the Directors have not yet reached final determination on all aspects of the fair value exercise. The Directors will finalise the fair values within 12 months of the acquisition date. The acquired oil and gas field interests are depreciated over their remaining useful economic lives on a unit of production basis in accordance with the Group’s accounting policies as set out in note 2. As explained in note 2, the depreciation relating to fair value uplifts relating to the acquired property, plant and equipment and related taxation is excluded in arriving at adjusted earnings for the year, which amounted to £20 million depreciation and a taxation credit of £10 million in the period.

British Energy The Group acquired a 20% interest in British Energy on 26 November 2009 and accounts for its interest as an investment in associate as set out in note 19. As explained in note 3, the Group has undertaken a provisional notional fair value exercise at the date of acquisition to allocate the cost of the investment to the individual assets, liabilities and contingent liabilities at their acquisition-date fair values. The fair values attributed are provisional as the Directors have not yet reached final determination on all aspects of the fair value exercise. The Directors will finalise the fair values within 12 months of the acquisition date. The Group’s share of provisional fair value adjustments made to the existing nuclear power stations amounts to £1,275 million resulting in an acquisition-date fair value attributable to these stations of £1,549 million. The nuclear power stations are depreciated over their useful economic lives in accordance with the Group’s accounting policies as set out in note 2. As explained in note 2, the impact of depreciation arising on fair value uplifts attributed to the nuclear power stations and related taxation included within the Group’s share of the post-taxation results of the associate is excluded in arriving at adjusted earnings for the period, which amounted to £7 million net of taxation.

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14. Earnings per ordinary share continued Review – Business Report Directors’

Year ended 31 December 2009 2008 (restated) (i)

Pence per Pence per ordinary ordinary (b) Continuing operations £m share £m share Earnings – basic 648 12.7 45 1.1 Net exceptional items after taxation (notes 2 and 8) 382 7.5 – – Certain re-measurement losses after taxation (notes 2 and 8) 72 1.4 918 21.8 Depreciation of fair value uplifts to property, plant and equipment from Strategic Investments, after taxation 17 0.3 – – Earnings – adjusted basic 1,119 21.9 963 22.9

Earnings – diluted 648 12.6 45 1.1

Earnings – adjusted diluted 1,119 21.8 963 22.8 – Governance Report Directors’

(i) Restated to capitalise borrowing costs on adoption of IAS 23 (Amendment) and to reflect the change in British Gas Services Limited’s revenue recognition policy, as explained in note 2. Also restated to present the European Energy segment, with the exception of the Group’s operations in Germany, as a discontinued operation, as explained in note 38.

2009 2008 (restated) (i)

Pence per Pence per ordinary ordinary (c) Discontinued operations £m share £m share Earnings/(loss) – basic 196 3.8 (182) (4.3) Earnings/(loss) – diluted 196 3.8 (182) (4.3)

(i) Restated to present the European Energy segment, with the exception of the Group’s operations in Germany, as a discontinued operation, as explained in note 38. Certain re-measurements (notes 2 and 8) included within operating profit and discontinued operations comprise re-measurements

arising on energy procurement activities and re-measurements of proprietary trades in relation to cross-border transportation or capacity Financial Statements contracts. All other re-measurements are included within results before exceptional items and certain re-measurements.

In addition to basic and adjusted basic earnings per ordinary share, information is presented for diluted and adjusted diluted earnings per ordinary share. Under this presentation, no adjustments are made to the reported earnings for either 2009 or 2008, however the weighted average number of shares used as the denominator is adjusted for potentially dilutive ordinary shares. In 2008, no outstanding awards or options were considered to be potentially dilutive for diluted earnings per ordinary share, because doing so would have decreased the loss per ordinary share. However, potentially dilutive ordinary shares were taken into account when calculating adjusted diluted earnings per ordinary share.

2009 2008 Shareholder Information Million Million (d) Weighted average number of shares shares shares Weighted average number of shares used in the calculation of basic earnings per ordinary share 5,121 4,198 Dilutive impact of share-based payment schemes 24 35 Weighted average number of shares used in the calculation of diluted earnings per ordinary share 5,145 4,233

Centrica plc Annual Report and Accounts 2009 99

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15. Goodwill

2009 2008 £m £m Cost and net book value 1 January 1,510 1,074 Acquisitions (note 37) 916 269 Adjustments to provisional fair values of acquisitions completed in previous year – 2 Impairments (note 17) (5) (45) Disposals (3) – Transfer to assets held for sale (i) (324) – Exchange adjustments (6) 210 31 December 2,088 1,510

(i) During 2009 European operations (excluding Germany) have been treated as discontinued operations, and Segebel S.A. has subsequently been sold (note 38) and hence goodwill arising on acquisition is no longer included within Group goodwill at 31 December 2009.

2009 2008 Analysis of goodwill at 31 December by acquisition £m £m Direct Energy 389 369 Energy America 28 31 Enron Direct/Electricity Direct 133 133 Enbridge Services 91 87 CPL/WTU 228 253 ATCO 54 51 Dyno-Rod 17 17 Residential Services Group 81 92 Oxxio (i) – 69 Newfield 57 57 Strategic Energy 94 104 Caythorpe 33 33 Heimdal 165 151 Venture 654 – Other 64 63 2,088 1,510

100

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16. Other intangible assets Review – Business Report Directors’

Emissions allowances and renewable Exploration and Application obligation Customer evaluation software (v) certificates Brands (i) relationships Consents expenditure Other Total £m £m £m £m £m £m £m £m Cost 1 January 2009 521 193 59 108 29 97 46 1,053 Additions – acquired from a third party 111 278 – 5 – 46 2 442 Additions – internally generated 29 1 – – – 1 – 31 Acquisitions (note 37) 15 8 15 202 – 100 263 603 Disposal of subsidiaries – – – – (17) – – (17) Transfer to assets held for sale (iv) (43) (5) (15) (218) – – (260) (541) Surrenders – (286) – – – – – (286) Write-downs recognised in income (ii) – – – – – (55) – (55)

Exchange adjustments – (1) – (17) – 4 (14) (28) – Governance Report Directors’ 31 December 2009 633 188 59 80 12 193 37 1,202 Aggregate amortisation and impairment 1 January 2009 278 31 – 37 2 – 34 382 Amortisation 70 – – 10 – – 10 90 Impairments recognised in income (iii) 21 35 – 20 – – – 76 Disposal of subsidiaries – – – – (2) – – (2) Surrenders – (29) – – – – – (29) Transfer to assets held for sale (iv) (18) – – (18) – – (10) (46) Exchange adjustments 1 – – (4) – – – (3) 31 December 2009 352 37 – 45 – – 34 468 Net book value at 31 December 2009 281 151 59 35 12 193 3 734 Financial Statements

Additions – internally generated 2 – – – – – – 2 Shareholder Information Acquisitions (note 37) – – 2 20 – 54 – 76 Disposals – (9) – (18) – – – (27) Surrenders – (100) – – – – – (100) Write-downs recognised in income (ii) – – – – – (22) – (22) Exchange adjustments 15 – – 20 – 8 1 44 31 December 2008 521 193 59 108 29 97 46 1,053 Aggregate amortisation and impairment 1 January 2008 214 – – 32 – – 32 278 Amortisation 58 – – 14 2 – 2 76 Impairments recognised in income (iii) – 31 – – – – – 31 Disposals – – – (18) – – – (18) Exchange adjustments 6 – – 9 – – – 15 31 December 2008 278 31 – 37 2 – 34 382 Net book value at 31 December 2008 243 162 59 71 27 97 12 671

(i) Brands include £57 million (2008: £57 million) associated with the Dyno-Rod brand, acquired on the acquisition of the Dyno group of companies during 2004. In accordance with IAS 38 paragraph 88, management has ascribed the brand an indefinite useful life because there is no foreseeable limit to the period over which the Dyno brand is expected to generate net cash inflows. In reaching this determination, management has reviewed potential threats from competition, the risks of technological obsolescence and the expected usage of the brand by management. (ii) A £55 million (2008: £22 million) write-down of exploration and evaluation expenditure was recognised through operating costs, £36 million (2008: £nil) as an exceptional item due to declining commodity prices making the assets uneconomic, £19 million (2008: £22 million) relating to unsuccessful drilling activity. (iii) A £35 million (2008: £31 million) impairment of emissions allowances was recognised within cost of sales, to reflect a reduction in fair value (less costs to sell) as a result of a decrease in market prices, that was offset by a reduction in the obligation related to emissions allowances of £35 million (2008: £31 million). A £21 million (2008: £nil) impairment of application software was recognised as an exceptional item due to restructuring activity in the Downstream UK business, as described in note 8. A £19 million (2008: £nil) impairment of customer relationship intangibles was recognised as an exceptional item due to increased customer churn in the Texas market of North America – Residential energy supply. (iv) During 2009 European operations (excluding Germany) have been treated as discontinued operations and Segebel S.A. was subsequently sold (note 38) and hence other intangible assets associated with these operations are no longer included within Group other intangible assets at year end. (v) Application software includes assets under construction with a cost of £40 million (2008: £nil).

Centrica plc Annual Report and Accounts 2009 101

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17. Impairment testing of goodwill and intangibles with indefinite useful lives (a) Carrying amount of goodwill and intangible assets with indefinite useful lives allocated to cash-generating units Goodwill acquired through business combinations and indefinite-lived intangible assets have been allocated for impairment testing purposes to individual cash-generating units each representing the lowest level within the Group at which the goodwill or indefinite-lived intangible asset is monitored for internal management purposes as follows:

2009 2008

Carrying Carrying amount of amount of Carrying indefinite-lived Carrying indefinite-lived Principal acquisitions to which amount of intangible amount of intangible goodwill and intangibles with indefinite goodwill asset Total goodwill asset Total Cash-generating unit useful lives relates £m £m £m £m £m £m Downstream UK – Business energy supply and services Enron Direct/Electricity Direct 133 – 133 133 – 133 Downstream UK – Residential services – Dyno-Rod Dyno-Rod 17 57 74 17 57 74 Upstream UK – Upstream gas and oil Newfield/Heimdal/Venture (i) 876 – 876 208 – 208 North America – Residential energy supply Direct Energy/ATCO/CPL/WTU (ii) 602 – 602 612 – 612 North America – Business Direct Energy/ATCO/Strategic energy supply Energy 191 – 191 196 – 196 North America – Residential Enbridge Services/Residential and business services Services Group (ii) 192 – 192 200 – 200 European Energy – Oxxio Oxxio (iii) – – – 69 – 69 Other Various (iv) 77 – 77 75 – 75 2,088 57 2,145 1,510 57 1,567

(i) Increase due primarily to goodwill arising from the acquisition of Venture Production plc during 2009 (note 37). (ii) Carrying amount of goodwill also contains goodwill from other Direct Energy acquisitions which are not significant compared with the aggregate carrying value of goodwill reported within the cash-generating unit. (iii) Oxxio has been classified as a discontinued operation in 2009 (note 38). (iv) Goodwill balances allocated across multiple cash-generating units. The amount of goodwill allocated to each cash-generating unit is not significant compared with the aggregate carrying value of goodwill reported within the Group. Included in this amount is £2 million impairment of goodwill attributable to Semplice Energy Ltd. £2 million of goodwill attributable to the Group’s interest in GLID Wind Farms TopCo Limited was disposed of in 2009, as described in note 38.

(b) Basis on which recoverable amount has been determined Value in use calculations have been used to determine recoverable amounts for all of the goodwill and indefinite-lived intangible asset balances noted above, with the exception of the impairment test for the Upstream UK – Gas production and development cash-generating unit, where fair value less costs to sell has been used as the basis for determining recoverable amount.

(i) Value in use The value in use calculations use pre-tax cash flow projections based on the Group’s internal Board-approved three-year business plans. The Group’s business plans are based on past experience, and adjusted to reflect market trends, economic conditions, key risks, the implementation of strategic objectives and changes in commodity prices, as appropriate. Commodity prices used in the planning process are based in part on observable market data and in part on internal estimates. The extent to which the commodity prices used in the business plans are based on observable market data is determined by the extent to which the market for the underlying commodity is judged to be active. Note 29 provides additional detail on the active period of each of the commodity markets in which the Group operates.

Cash flows beyond the three-year plan period have been extrapolated using growth rates in line with historic long-term growth rates in the market where the cash-generating unit operates.

Cash flows are discounted using a discount rate specific to each cash-generating unit to determine the cash-generating unit’s value in use, which is then deemed to be its recoverable amount. The recoverable amount is compared to the carrying value of each cash-generating unit’s net assets to determine whether the carrying values of any of the Group’s goodwill or indefinite-lived intangible asset balances are greater than their corresponding recoverable amounts.

(ii) Fair value less costs to sell Fair value less costs to sell is used as the basis for determining the recoverable amount of goodwill allocated to Upstream UK – Upstream gas and oil. This methodology is deemed to be more appropriate as it is based on the post-tax cash flows arising from each field within Upstream UK – Upstream gas and oil. This is consistent with the approach taken by management to evaluate the economic value of the underlying assets.

Fair value less costs to sell is determined by discounting the post-tax cash flows expected to be generated by the gas production and development assets within Upstream UK – Upstream gas and oil, net of associated selling costs, taking into account those assumptions that market participants would use in estimating fair value. Post-tax cash flows are derived from projected production profiles of each field within Upstream UK – Upstream gas and oil, taking into account forward prices for gas and liquids over the relevant period.

102

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17. Impairment testing of goodwill and intangibles with indefinite useful lives continued Review – Business Report Directors’ Where forward market prices are not available, prices are determined based on internal model inputs. Note 29 provides additional detail on the active period of each of the commodity markets in which the Group operates.

The date of cessation of production depends on the interaction of a number of variables, such as the recoverable quantities of hydrocarbons, production costs, the contractual duration of the licence area and the selling price of the gas and liquids produced. As each field has specific reservoir characteristics and economic circumstances, the post-tax cash flows for each field are computed using individual economic models and key assumptions as determined by management. Post-tax cash flows used in the fair value less costs to sell calculation for the first three years are based on the Group’s internal Board-approved three-year business plans and, thereafter, are based on long-term production and cash flow forecasts. Where necessary, the business plan and long-term forecasts are updated in the economic models to reflect the latest view of each field as at the balance sheet date. The future post-tax cash flows are discounted using a post-tax nominal discount rate of 7% to determine the fair value less costs to sell of Upstream UK – Upstream gas and oil. Fair value less costs to sell is compared to the carrying value of the Upstream UK – Upstream gas and oil cash-generating unit to determine whether goodwill is impaired. The discount rate used in the fair value less costs to sell calculation is determined in the same manner as the discount rates used in the value in use calculations described below, with the exception of the adjustment required to

determine an equivalent pre-tax discount rate that is not required for the fair value less costs to sell calculation. – Governance Report Directors’

(c) Key rates used in value in use calculations (i) Growth rate to perpetuity Long-term growth rates are determined using a blend of publicly available historical data and long-term growth rate forecasts published by external analysts.

(ii) Discount rates Discount rates reflect the current market assessments of the time value of money and are derived from the Group’s weighted average cost of capital. Risks specific to cash-generating units are reflected within cash flow forecasts. Each cash-generating unit’s weighted average cost of capital is then adjusted to reflect the impact of tax in order to calculate an equivalent pre-tax discount rate.

Long-term growth rates used in the value in use calculations for each of the Group’s cash-generating units are provided in the table below together with pre-tax discount rates. Financial Statements Downstream UK – North America – North America – North America – Business energy Downstream UK – Residential Business Residential and supply and services Residential services energy supply energy supply business services Growth rate to perpetuity 1.7% 1.7% 1.5% 2.0% 1.9% Pre-tax discount rate 7.6% 7.6% 7.5% 7.5% 7.5%

(iii) Inflation rates Inflation rates used in the three-year business plan were based on a blend of a number of publicly available inflation forecasts available in the UK, Canada and the US. Inflation rates used for the value in use calculations were as follows: UK – 1.7% in 2010–2012,

Canada – 1.8% in 2010–2012 and the US – 2.0% in 2010–2012. Shareholder Information

(d) Key assumptions used and summary of results (i) Downstream UK – Business energy supply and services Key assumptions • Gross margin percentage: based on the contractual terms for customers on existing contracts and gross margin percentages achieved in the period leading up to approval of the business plan for new and renewal customers, adjusted to reflect current market conditions and higher expected transportation costs. • Revenues: based on the average market share achieved immediately prior to the approval of the business plan, adjusted for growth forecasts based on sales and marketing activity and recent customer acquisitions, with prices based on forward market curves for both gas and electricity. • Operating costs: based on a projection of headcount in line with expected activity and salary increases based on inflation expectations, with a slight increase in the provision for credit losses experienced historically to reflect the current economic environment in the UK.

Summary of results The recoverable amount of the Downstream UK – Business energy supply and services cash-generating unit exceeded its carrying value at the impairment test date. Reasonably possible changes in the key assumptions listed above would not cause the recoverable amount of the goodwill to be equal to or less than the carrying amount.

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17. Impairment testing of goodwill and intangibles with indefinite useful lives continued (ii) Downstream UK – Residential services – Dyno-Rod Key assumptions • Gross margin percentage: based on gross margins achieved in the period leading up to the approval of the business plan. • Revenues: based on revenue levels achieved in the period leading up to the approval of the business plan adjusted for the impact of increased marketing spend and the targeting of key accounts with individual sales staff, with a slight reduction in growth rates to reflect the current economic environment in the UK. • Operating costs: based on a projection of headcount in line with expected activity and salary increases based on inflation expectations.

Summary of results The recoverable amount of the Downstream UK – Residential services – Dyno-Rod cash-generating unit exceeded its carrying value at the impairment test date. Reasonably possible changes in the key assumptions listed above would not cause the recoverable amount of the goodwill or indefinite-lived intangible asset to be equal to or less than their carrying amounts.

(iii) Upstream UK – Upstream gas and oil Key assumptions • Cash inflows: based on forward market prices for gas and oil for the active period of the market and internal model inputs thereafter, with reserve volumes and production profiles based on internal management or operator estimates. • Cash outflows: based on forecast capital and operating expenditure and the estimated future costs of abandonment. • Taxation: based on tax rates expected to be in effect at the point of the forecast cash flow. Summary of results The recoverable amount of the Upstream UK – Gas production and development cash-generating unit exceeded its carrying value at the impairment test date. Reasonably possible changes in the key assumptions listed above would not cause the recoverable amount of the goodwill to be equal to or less than the carrying amount.

(iv) North America – Residential energy supply Key assumptions • Gross margin percentage: based on contractual terms for customers on existing contracts and gross margin percentages achieved in the period leading up to the approval of the business plan for new and renewal customers, adjusted to reflect competitor data, where available. Where applicable, regulated gross margin percentages are based on the gross margin percentages included in regulatory applications submitted to the Alberta Utilities Commission in Canada. • Revenues: based on average market share by individual market sector achieved in the period immediately prior to the approval of the business plan, adjusted for expectations of growth or decline based on individual jurisdictions to reflect regulatory or competitive differences, including customer propensity to switch, and contractual prices, with non-contractual prices based on forward market gas and power curves in Canada and the US. • Operating costs: based on a projection of headcount in line with expected activity and salary increases based on inflation expectations, with a slight decrease in costs to reflect planned business process efficiencies.

Summary of results The recoverable amount of the North America – Residential energy supply cash-generating unit exceeded its carrying value at the impairment test date. Reasonably possible changes in the key assumptions listed above would not cause the recoverable amount of the goodwill to be equal to or less than the carrying amount.

(v) North America – Business energy supply Key assumptions • Gross margin percentage: based on contractual terms for gross margin under contract and historical experience for planned renewals and new sales. Unit margins were planned to achieve an acceptable return on risk adjusted capital. • Revenues: based on historical growth trends and planned sales activities by individual market sector. Prices are based on forward market curves for gas and electricity in Canada and the US. • Operating costs: based on historical trends adjusted to reflect expected cost optimisations, as well as improved bad debt performance as a result of assumed economic and credit market recovery.

Summary of results The recoverable amount of the North America – Business energy supply cash-generating unit exceeded its carrying value at the impairment test date. Reasonably possible changes in the key assumptions listed above would not cause the recoverable amount of the goodwill to be equal to or less than the carrying amount.

(vi) North America – Residential and business services Key assumptions • Gross margin percentage: based on gross margin percentages achieved in the period leading up to the approval of the business plan, adjusted to reflect the current economic conditions and housing decline in North America. • Revenues: based on historical growth trends by individual market sector, adjusted for new product offerings and continued penetration into new markets. • Operating costs: based on projected headcount and inflationary increases.

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17. Impairment testing of goodwill and intangibles with indefinite useful lives continued Review – Business Report Directors’ Summary of results An amount of £3 million of goodwill attributable to the North America – Residential and business services cash-generating unit was written off as a result of the Appliances division being classified as held for sale (in accordance with IFRS 5, Non-current Assets Held for Sale and Discontinued Operations, the assets should be written down to the lower of their cost and recoverable amount). The recoverable amount of the North America – Residential and business services cash-generating unit exceeded its carrying value at the impairment test date. Reasonably possible changes in the key assumptions listed above would not cause the recoverable amount of the goodwill to be equal to or less than the carrying amount. 18. Property, plant and equipment

Plant, Land and equipment Power Gas storage and buildings and vehicles generation production (i) (ii), (iii) (ii),(iii) (ii),(iii),(iv) Total £m £m £m £m £m Cost

1 January 2009 (restated) (vii) 22 424 2,483 6,234 9,163 – Governance Report Directors’ Additions 60 5 316 469 850 Capitalised borrowing costs (note 10) – – – 34 34 Acquisitions (note 37) 13 14 903 1,796 2,726 Fair value unwind capitalisation (vi) – – – (18) (18) Disposals – (5) (9) (4) (18) Reclassification as joint venture – – (370) – (370) Transfer to assets held for sale (v) (71) (47) (1,094) – (1,212) Revisions and additions to decommissioning liability (note 28) – – (6) 74 68 Exchange adjustments (1) (2) (79) 64 (18) 31 December 2009 23 389 2,144 8,649 11,205 Aggregate depreciation and impairment 1 January 2009 10 167 434 3,863 4,474 Financial Statements Charge for the year 2 43 144 455 644 Disposals – (5) (9) (4) (18) Reclassification as joint venture – – (27) – (27) Impairments – 2 35 52 89 Transfer to assets held for sale (v) (1) (7) (24) – (32) Exchange adjustments – 3 (8) 21 16 31 December 2009 11 203 545 4,387 5,146

Net book value at 31 December 2009 12 186 1,599 4,262 6,059 Shareholder Information

Plant, Land and equipment Power Gas storage and buildings and vehicles generation production (i) (ii), (iii) (ii),(iii) (ii),(iii),(iv),(vi) Total £m £m £m £m £m Cost 1 January 2008 39 288 2,076 5,433 7,836 Additions – 115 312 204 631 Capitalised borrowing costs (note 10) (vii) – – – 9 9 Acquisitions (note 37) – 4 – 342 346 Disposals (18) (8) (8) – (34) Revisions and additions to decommissioning liability (note 28) – – 16 165 181 Exchange adjustments 1 25 87 81 194 31 December 2008 (restated) (vii) 22 424 2,483 6,234 9,163 Aggregate depreciation and impairment 1 January 2008 17 121 305 3,483 3,926 Charge for the year 1 46 117 351 515 Disposals (8) (8) (7) – (23) Exchange adjustments – 8 19 29 56 31 December 2008 10 167 434 3,863 4,474 Net book value at 31 December 2008 (restated) (vii) 12 257 2,049 2,371 4,689

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18. Property, plant and equipment continued During 2009, declining commodity prices have given rise to impairment charges within Upstream UK – Power generation (£35 million), Upstream UK – Upstream gas and oil (£22 million) and North America – Upstream and wholesale energy (£30 million). The impairment charges arise as a result of the assets being written down to the higher of their value in use (Upstream UK – Power generation) or fair value less costs to sell (Upstream UK – Upstream gas and oil, and North America – Upstream and wholesale energy). Note 17 provides more detail on the general approach to impairment calculations and provides the assumptions used to assess Upstream UK – Upstream gas and oil for impairment. For North America – Upstream and wholesale energy, fair value less cost to sell is determined based on evidence from recent acquisition transactions for similar assets in the local oil and gas market, net of estimated selling costs.

For Upstream UK – Power generation assets, the future cash flows were discounted using a pre-tax discount rate of 7.6%. The key assumptions are:

• Cash inflows: based on forward market prices for power for the active period of the market and internal models thereafter, with production profiles based on best economic running decision; • Cash outflows: based on planned operating and capital expenditure; and • Taxation: based on tax rates expected to be in effect at the point of the forecast cash flow.

2009 2008 (i) The net book value of land and buildings comprises the following: £m £m Freeholds 6 5 Long leaseholds 1 1 Short leaseholds 5 6 12 12

2009 2008 (ii) Assets in the course of construction are included within the following categories of property, plant and equipment: £m £m Plant, equipment and vehicles 20 33 Power generation 355 697 Gas storage and production 757 186 1,132 916

(iii) Assets held under finance leases included in totals above: 2009 2008

Plant, equipment Power Gas storage and Power Gas storage and and vehicles generation production Total generation production Total £m £m £m £m £m £m £m Cost at 1 January – 469 415 884 469 415 884 Additions 2 – – 2 – – – Cost at 31 December 2 469 415 886 469 415 884 Aggregate depreciation at 1 January – 118 360 478 90 352 442 Charge for the year 1 28 5 34 28 8 36 Aggregate depreciation at 31 December 1 146 365 512 118 360 478 Net book value at 31 December 1 323 50 374 351 55 406

(iv) The net book value of decommissioning costs included within power generation and gas storage and production assets was £565 million (2008: £413 million). (v) During 2009 European operations (excluding Germany) have been treated as discontinued operations and Segebel S.A. was subsequently sold (note 38) and hence property, plant and equipment associated with these operations are no longer included within Group property, plant and equipment at 31 December 2009. (vi) Relates to the consumption of a rig contract which was out-of-the-money on acquisition. As the contract is utilised, the fair value is added to the cost of the associated fixed assets. (vii) Restated to capitalise borrowing costs on adoption of IAS 23 (Amendment), as explained in note 2.

The net book value of assets to which title was restricted at 31 December 2009 was £374 million (2008: £351 million), of which £324 million (2008: £351 million) relates to the Spalding power station finance lease asset. The net book value of assets pledged as security for liabilities as at 31 December 2009 was £157 million (2008: £nil).

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19. Interests in joint ventures and associates Review – Business Report Directors’

Investments in joint ventures Shareholder and associates loans Total (a) Interest in joint ventures and associates £m £m £m 1 January 2009 286 44 330 Additions (i), (ii) 2,303 39 2,342 Reclassification as a subsidiary (iii) (216) – (216) Decrease in shareholder loans – (17) (17) Disposals of investments (1) – (1) Share of profits for the year 1 – 1 Exchange adjustments (17) – (17) 31 December 2009 2,356 66 2,422

(i) On 26 November 2009, the Group acquired a 20% interest in Lake Acquisitions Limited (British Energy) for £2,255 million, which is the holding company of the British Energy Group and a 20% interest in NNB Holding Company Limited for £32 million, which is the investment vehicle for new nuclear build activity.

(ii) Other additions relate to the reclassification of interests in GLID Wind Farms TopCo Limited (note 38) and the acquisitions of North Sea Infrastructure Partners Limited, Bacton Storage Company – Governance Report Directors’ Limited, Secure Electrans Limited, Ten Degrees North Energy Limited and Sevan Production General Partnership. (iii) On 20 January 2009 the Group gained control of Segebel S.A. and from this date until the date of subsequent disposal the investment was consolidated as a subsidiary (notes 37 and 38).

Investments in joint ventures Shareholder and associates loans Total £m £m £m 1 January 2008 222 63 285 Decrease in shareholder loans – (19) (19) Share of profits for the year (i) 12 – 12 Exchange adjustments 52 – 52 31 December 2008 286 44 330

(i) Share of profits for 2008 includes £3 million in respect of Segebel S.A., which was classified as discontinued in 2009.

(b) Share of joint ventures’ and associates’ assets and liabilities Financial Statements The Group’s share of joint ventures’ and associates’ gross assets and gross liabilities at 31 December 2009 principally comprises its interests in Braes of Doune Wind Farm (Scotland) Limited, Barrow Offshore Wind Limited, GLID Wind Farms TopCo Limited, Lake Acquisitions Limited (British Energy) and NNB Holding Company Limited.

The Group’s share of the investments in and results of Braes of Doune Wind Farm (Scotland) Limited, Barrow Offshore Wind Limited, GLID Wind Farms TopCo Limited, Lake Acquisitions Limited (British Energy) and NNB Holding Company Limited are included within the Upstream UK – Power generation segment. The Group’s share of the investments in and results of Secure Electrans Limited are included within the Downstream UK – Residential energy supply segment. The Group’s share of the investments in and results of Bacton Storage Company Limited are included within the Storage UK segment. The Group’s share of the investments in and results of Shareholder Information North Sea Infrastructure Partners Limited, Ten Degrees North Energy Limited and Sevan Production General Partnership are included within the Upstream UK – Upstream gas and oil segment.

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19. Interests in joint ventures and associates continued

2009 2008

Joint ventures Associates

Braes of Doune Lake Acquisitions NNB Holding Wind Farm Barrow Offshore GLID Wind Farms Limited Company (Scotland) Limited Wind Limited TopCo Limited (i) (British Energy) Limited Other (ii) Total Total £m £m £m £m £m £m £m £m Share of non-current assets 33 59 146 3,773 31 36 4,078 412 Share of current assets 10 14 32 628 5 13 702 204 43 73 178 4,401 36 49 4,780 616 Share of current liabilities (7) (1) (41) (188) (4) (2) (243) (173) Share of non-current liabilities (23) (23) (152) (1,981) – (2) (2,181) (157) (30) (24) (193) (2,169) (4) (4) (2,424) (330) Share of net assets of joint ventures and associates 13 49 (15) 2,232 32 45 2,356 286 Shareholder loans 22 5 22 15 – 2 66 44 Interests in joint ventures and associates 35 54 7 2,247 32 47 2,422 330

Net cash/(debt) included in share of net assets 24 11 181 20 3 (2) 237 (11)

(i) As part of a finance arrangement entered into by GLID Wind Farms TopCo Limited, the Group’s shares in GLID Wind Farms TopCo Limited are pledged to a third party. The pledge will only come into force should GLID Wind Farms TopCo Limited default on any of its obligations under the finance arrangement. (ii) Other includes joint ventures of North Sea Infrastructure Partners Limited, Bacton Storage Company Limited and Secure Electrans Limited and associates of Ten Degrees North Energy Limited and Sevan Production General Partnership.

Joint ventures Associates

Braes of Doune Lake Acquisitions Wind Farm Barrow Offshore GLID Wind Farms Limited (Scotland) Limited Wind Limited TopCo Limited (British Energy) Total Total £m £m £m £m £m £m Income 8 13 3 52 76 21 Expenses excluding certain re-measurements (ii) (3) (5) (1) (49) (58) (9) Certain re-measurements – – – (12) (12) – 5 8 2 (9) 6 12 Interest – (1) (1) (2) (4) – Taxation excluding certain re-measurements (ii) (2) (2) – – (4) (3) Taxation on certain re-measurements – – – 3 3 – Share of post-taxation results of joint ventures and associates (iii) 3 5 1 (8) 1 9

(i) Restated to present Segebel S.A. as a discontinued operation, as explained in note 38. (ii) Includes £10 million (2008: £nil) relating to depreciation of fair value uplifts to property, plant and equipment on acquiring the British Energy investments. The associated tax impact is £3 million credit (2008: £nil). (iii) No profits or losses arose in NNB Holding Company Limited or in Other.

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19. Interests in joint ventures and associates continued Review – Business Report Directors’ British Energy The Group acquired a 20% interest in British Energy for £2,255 million and NNB Holding Company Limited for £32 million on 26 November 2009, including transaction costs of £15 million which were unpaid at 31 December 2009. As explained in note 2, the Group has undertaken a provisional notional fair value exercise at the date of acquisition to allocate the cost of the investment to the individual assets, liabilities and contingent liabilities at their acquisition-date fair values. The fair values attributed at acquisition date are provisional as the Directors have not yet reached final determination on all aspects of the fair value exercise. The Directors will finalise the fair values within 12 months of the acquisition date. The Group’s share of loss arising from its investment in British Energy for the period 26 November 2009 to 31 December 2009 as set out in the table above includes the effect of unwinding the fair value adjustments. As explained in note 2 the depreciation, net of taxation, arising on fair value uplifts attributed to the nuclear power stations is reversed in arriving at adjusted profit for the period as shown in the reconciliation table below and as set out in notes 6 and 14.

(d) Reconciliation of share of profits/(losses) in joint ventures and associates to share 2008 of adjusted profits/(losses) in joint ventures and associates 2009 (restated) (i)

Joint ventures Associates

Braes of Doune Lake Acquisitions – Governance Report Directors’ Wind Farm Barrow Offshore GLID Wind Farms Limited (Scotland) Limited Wind Limited TopCo Limited (British Energy) Total Total £m £m £m £m £m £m Share of post-taxation results of joint ventures and associates 3 5 1 (8) 1 9 Certain re-measurements (net of taxation) – – – 9 9 – Depreciation – British Energy (net of taxation) (ii) – – – 7 7 – Interest – 1 1 2 4 – Taxation (excluding certain re-measurements and British Energy depreciation) 2 2 – 3 7 3 Share of adjusted results of joint ventures and associates 5 8 2 13 28 12

(i) Restated to present Segebel S.A. as a discontinued operation, as explained in note 38. (ii) Relates to depreciation of fair value uplifts to property, plant and equipment on acquiring the British Energy investments. Financial Statements

20. Inventories

2009 2008 £m £m Gas in storage and transportation 140 223 Other raw materials and consumables 108 93 Finished goods and goods for resale 134 96 382 412 Shareholder Information The Group consumed £786 million of inventories (2008: £515 million) during the year. Write-downs of inventory of £3 million (2008: £23 million) were recognised in gross profit during the year to reflect the impact of a reduction in the forward market price of gas on the net realisable value of gas in storage and transportation, with £1 million recognised in Direct Energy and £2 million recognised in Centrica Energy.

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21. Trade and other receivables

2009 2008

Current Non-current Current Non-current £m £m £m £m Financial assets: Trade receivables 1,711 14 2,142 25 Accrued energy income 1,876 – 2,480 – Cash collateral pledged 631 – 669 – Other receivables 331 11 330 9 4,549 25 5,621 34 Less: Provision for credit losses (554) – (541) – 3,995 25 5,080 34 Non-financial assets: Prepayments and other receivables 186 118 255 – 4,181 143 5,335 34

Trade and other receivables include financial assets representing the contractual right to receive cash or other financial assets from residential customers, business customers and treasury, trading and energy procurement counterparties as follows:

2009 2008

Current Non-current Current Non-current £m £m £m £m Financial assets by class: Residential customers 1,883 14 2,217 25 Business customers 1,495 11 1,651 9 Treasury, trading and energy procurement counterparties 1,171 – 1,753 – 4,549 25 5,621 34 Less: Provision for credit losses (554) – (541) – 3,995 25 5,080 34

Receivables from residential and business customers are generally considered to be fully performing until such time as the payment that is due remains outstanding past the contractual due date. Contractual due dates range from being due upon receipt to due in 30 days. An ageing of the carrying value of trade and other receivables that are past due but not considered to be individually impaired by class is as follows:

2009 2008

Treasury, trading Treasury, trading and energy and energy Residential Business procurement Residential Business procurement customers customers counterparties customers customers counterparties Days past due £m £m £m £m £m £m Less than 30 days 199 124 119 299 123 5 30–89 days 75 163 – 127 141 2 Less than 90 days 274 287 119 426 264 7 90–182 days 63 49 2 89 34 – 183–365 days 98 76 2 109 51 5 Greater than 365 days 41 16 1 126 17 5 476 428 124 750 366 17

At 31 December 2009, there were £34 million (2008: £107 million) of receivables, net of provisions for credit losses, from residential customers and £8 million (2008: £25 million) from treasury, trading and energy procurement counterparties that were considered to be individually impaired. There were no individually impaired receivables (2008: £nil), net of provisions for credit losses, from business customers. Receivables from residential customers are generally reviewed for impairment on an individual basis once a customer discontinues their relationship with the Group. The provision for credit losses is based on an incurred loss model and is determined by application of expected default and loss factors, determined by historical loss experience and current sampling to the various balances receivable from residential and business customers on a portfolio basis, in addition to provisions taken against individual accounts. Balances are written off when recoverability is assessed as being remote. Movements in the provision for credit losses by class are as follows:

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21. Trade and other receivables continued Review – Business Report Directors’

Treasury, trading and energy Residential Business procurement customers customers counterparties Total 2009 £m £m £m £m 1 January (399) (131) (11) (541) Impairment of trade receivables (240) (116) (1) (357) Transfer to assets held for sale (i) 24 4 – 28 Receivables written off 247 62 – 309 Exchange adjustments 6 1 – 7 31 December (362) (180) (12) (554)

(i) During 2009, European operations (excluding Germany) have been treated as discontinued operations (note 38) and hence provisions for credit losses are no longer included within Group trade and other receivables at year end.

Treasury, trading

and energy – Governance Report Directors’ Residential Business procurement customers customers counterparties Total 2008 £m £m £m £m 1 January (350) (81) – (431) Impairment of trade receivables (141) (85) (11) (237) Receivables written off 118 38 – 156 Exchange adjustments (26) (3) – (29) 31 December (399) (131) (11) (541)

The charge for the impairment of trade receivables is stated net of credits for the release of specific provisions made in previous years, relating mainly to residential customers in the UK, which are no longer required. At 31 December 2009, the Group held £17 million (2008: £23 million) of customer deposits for the purposes of mitigating the credit risk associated with receivables from residential and business customers. Exposure to credit risk associated with receivables from treasury, trading and energy procurement counterparties

is monitored by counterparty credit rating as follows: Financial Statements

Receivables from treasury, trading and energy procurement counterparties by Carrying value AAA to AA AA- to A- BBB+ to BBB- BB+ to BB- B or lower Unrated credit rating £m £m £m £m £m £m £m 2009 1,171 12 703 237 13 12 194 2008 1,753 351 1,021 260 3 11 107 The unrated counterparty receivables are comprised primarily of amounts due from subsidiaries of rated entities, exchanges or clearing houses. Receivables from treasury, trading and energy procurement counterparties are managed in accordance with the Group’s counterparty credit policy as described in note 4. Shareholder Information 22. Derivative financial instruments Derivative financial instruments are generally held for the purpose of proprietary energy trading, treasury management or energy procurement. Derivatives held for the purpose of proprietary energy trading are carried at fair value, with changes in fair value recognised in the Group’s results for the year before exceptional items and certain re-measurements, with the exception of certain derivatives related to cross-border transportation and capacity contracts (note 2). Derivative financial instruments held for the purposes of treasury management or energy procurement are also carried at fair value, with changes in the fair value of derivatives relating to treasury management reflected in the results for the year before exceptional items and certain re-measurements, and those relating to energy procurement reflected in certain re-measurements. In cases where a derivative qualifies for hedge accounting, derivatives are classified as fair value hedges, cash flow hedges or hedges of a net investment in a foreign operation. Notes 2 and 23 provide further detail on the Group’s hedge accounting. Energy contracts designated at fair value through profit and loss include certain energy contracts that the Group has, at its option, designated at fair value through profit and loss under IAS 39 because the energy contract contains one or more embedded derivatives that significantly modify the cash flows under the contract (note 2).

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22. Derivative financial instruments continued The carrying values of derivative financial instruments by product type for accounting purposes are as follows:

2009 2008 (restated) (i) 2007 (restated) (i) £m £m £m Derivative financial instruments – held for proprietary energy trading: Derivative financial instruments – held for trading under IAS 39 Energy derivatives – assets 68 119 44 Energy derivatives – liabilities (3) (6) (52) 65 113 (8) Derivative financial instruments – held for the purpose of treasury management or energy procurement: Derivative financial instruments – held for trading under IAS 39 Energy derivatives – assets 590 1,409 893 Energy derivatives – liabilities (2,134) (3,338) (1,204) Interest rate derivatives – assets 3 2 2 Interest rate derivatives – liabilities (5) (19) (5) Foreign exchange derivatives – assets 45 200 18 Foreign exchange derivatives – liabilities (79) (295) (77) (1,580) (2,041) (373) Contracts designated at fair value through profit and loss: Energy derivatives – assets − 109 9 Energy derivatives – liabilities (177) (95) (86) (177) 14 (77) Derivative financial instruments in hedge accounting relationships: Energy derivatives – assets 2 24 122 Energy derivatives – liabilities (328) (365) (67) Interest rate derivatives – assets 69 62 − Interest rate derivatives – liabilities (10) (4) (7) Foreign exchange derivatives – assets 31 100 − Foreign exchange derivatives – liabilities (14) (77) (19) (250) (260) 29 Net total (1,942) (2,174) (429)

The net total reconciles to the Balance Sheet as follows:

2009 2008 (restated) (i) 2007 (restated) (i) £m £m £m Derivative financial instruments – non-current assets 316 869 496 Derivative financial instruments – current assets 492 1,156 592 808 2,025 1,088 Derivative financial instruments – current liabilities (1,744) (2,670) (694) Derivative financial instruments – non-current liabilities (1,006) (1,529) (823) (2,750) (4,199) (1,517) Net total (1,942) (2,174) (429)

(i) Restated to classify the non-current portions of derivative financial instruments from current assets and liabilities to non-current assets and liabilities. The contracts included within energy derivatives are subject to a wide range of detailed specific terms but comprise the following general components:

2009 2008 £m £m Short-term forward market purchases and sales of gas and electricity: UK and Europe (1,091) (748) North America (583) (814) Structured gas purchase contracts (34) (28) Structured gas sales contracts (135) (450) Other (139) (103) Net total (1,982) (2,143)

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22. Derivative financial instruments continued Review – Business Report Directors’

2009 2008

Income Income Statement Equity Statement Equity Net gains/(losses) on derivative financial instruments due to re-measurement £m £m £m £m Financial assets and liabilities measured at fair value: Derivative financial instruments – held for proprietary energy trading (48) − 117 – Derivative financial instruments – held for trading under IAS 39 153 − (1,621) – Energy contracts designated at fair value through profit and loss (36) − (16) – Derivative financial instruments in hedge accounting relationships (15) 43 82 (360) 54 43 (1,438) (360)

Derivative-related credit risk – assets Credit risk from derivative transactions is generated by the potential for the counterparty to default on its contractual obligations. Therefore, derivative-related credit risk is represented by the positive fair value of the instrument and is normally a small fraction Directors’ Report – Governance Report Directors’ of the contract’s notional amount. Credit risk from derivatives is measured and managed by counterparty credit rating as follows:

Fair value of derivative financial instruments with Carrying value AAA to AA AA- to A- BBB+ to BBB- BB+ to BB- B or lower Unrated a positive fair value by counterparty credit rating £m £m £m £m £m £m £m 2009 808 35 567 44 3 − 159 2008 2,025 73 1,621 153 4 5 169

To manage derivative-related counterparty credit exposure, the Group employs the use of margining and set-off rights in some agreements. Under margining agreements, the Group has the right to request that the counterparty pay down or collateralise the current fair value of its derivatives position when the position passes a specified threshold. Details of collateral balances held at 31 December 2009 are provided in note 4.

Maturity profiles of derivative financial instruments – liabilities

The following maturity analysis shows the remaining contractual maturities on an undiscounted basis for the Group’s derivative financial Financial Statements instruments that are in a loss position at the balance sheet date and will be settled on a net basis:

2009 2008 Energy derivatives that will be settled on a net basis £m £m Less than one year (325) (456) One to five years (185) (148) More than five years − – (510) (604)

Shareholder Information 2009 2008 Interest rate derivatives that will be settled on a net basis £m £m Less than one year 1 (18) One to five years − (7) More than five years (29) – (28) (25)

Certain of the Group’s energy contracts that are accounted for as derivatives are for the physical purchase of energy. In these cases, IFRS 7 requires disclosure of a maturity analysis that shows cash outflows on all purchase contracts on an undiscounted basis, including those derivative contracts in a gain position at the balance sheet date as follows:

2009 2008 Energy procurement contracts that are carried at fair value £m £m Less than one year (15,314) (20,426) One to five years (17,865) (21,538) More than five years (4,877) (8,095) (38,056) (50,059)

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22. Derivative financial instruments continued The Group’s foreign exchange derivative contracts will be settled on a gross basis. In these cases, IFRS 7 requires disclosure of a maturity analysis that shows cash outflows on all derivative contracts on an undiscounted basis, including those derivative contracts in a gain position at the balance sheet date. In addition to cash outflows on all foreign exchange derivative contracts that are gross settled on an undiscounted basis, the following analysis also provides disclosure of the related cash inflows as follows:

2009 2008

Outflow Inflow Outflow Inflow Foreign exchange derivatives that will be settled on a gross basis £m £m £m £m Less than one year (1,925) 1,899 (4,394) 4,227 One to five years (1,444) 1,426 (487) 528 More than five years (232) 242 (150) 137 (3,601) 3,567 (5,031) 4,892

23. Hedge accounting For the purposes of hedge accounting, hedges are classified as either fair value hedges, cash flow hedges or hedges of net investments in foreign operations. Note 2 details the Group’s accounting policies in relation to derivatives qualifying for hedge accounting under IAS 39. The fair values of derivative and primary financial instruments in hedge accounting relationships at 31 December were as follows:

2009 2008

Assets Liabilities Assets Liabilities £m £m £m £m Fair value hedges 70 5 72 – Cash flow hedges 32 347 96 369 Net investment hedges: Primary financial instruments – – – 225 Derivative financial instruments – – 18 77

Fair value hedges The Group’s fair value hedges consist of interest rate swaps, cross-currency interest rate swaps and forward rate agreements used to protect against changes in the fair value of fixed-rate, long-term debt due to movements in market interest rates. For qualifying fair value hedges, all changes in the fair value of the hedging instrument and in the fair value of the hedged item in relation to the risk being hedged are recognised as income within net interest expense.

Gains or losses arising on fair value hedges at 31 December were as follows:

2009 2008 Gains/(losses) £m £m On hedging instruments (12) 81 On hedged items attributable to the hedged risk 14 (82) 2 (1)

Cash flow hedges The Group’s cash flow hedges consist primarily of: (a) physical and financial gas and power purchase contracts used to protect against the variability in future cash flows associated with highly probable forecast purchases of gas and power due to movements in market commodity prices; (b) forward foreign exchange contracts used to protect against the variability of functional currency denominated cash flows associated with non-functional currency denominated highly probable forecast transactions; and (c) interest rate swaps, cross-currency interest rate swaps and forward rate agreements used to protect against the variability in cash flows associated with floating-rate borrowings due to movements in market interest rates.

Gains and losses are initially recognised in the cash flow hedging reserve in other comprehensive income and are transferred to the Income Statement when the forecast cash flows affect the Income Statement. Note 31 details movements in the cash flow hedging reserve. The ineffective portion of gains and losses on cash flow hedging are recognised immediately in the Income Statement. During 2009, the Group recognised a £2 million loss (2008: £4 million loss) due to cash flow hedge ineffectiveness.

Net investment hedges The Group’s net investment hedges consist of foreign currency debt issued in the same currency as the net investment, foreign exchange forwards and cross-currency interest rate swaps used to protect against the variability in the pounds sterling value of the Group’s net investments in foreign operations due to movements in the relative strength of foreign currencies to pounds sterling.

Gains and losses on the effective portion of the hedge are recognised in equity and transferred to the Income Statement on disposal of the foreign operation. Gains and losses on the ineffective portion of the hedge are recognised immediately in the Income Statement. During 2009, the Group recognised losses of £4 million due to net investment hedge ineffectiveness (2008: £nil).

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24. Cash and cash equivalents Review – Business Report Directors’

2009 2008 £m £m Cash at bank, in transit and in hand 121 87 Short-term deposits 1,173 2,852 Cash and cash equivalents 1,294 2,939

Cash and cash equivalents includes £64 million (2008: £34 million) held by the Group’s insurance subsidiary undertakings that is not readily available to be used for other purposes within the Group.

Carrying value AAA AA A Unrated Cash and cash equivalents by counterparty credit rating £m £m £m £m £m 2009 1,294 818 172 304 – 2008 2,939 1,488 751 692 8

Credit risk associated with cash and cash equivalents is managed in accordance with the Group’s counterparty credit policy as described in note 4. – Governance Report Directors’ 25. Trade and other payables

2009 2008 (restated) (i)

Current Non-current Current Non-current £m £m £m £m Financial liabilities: Trade payables 784 – 1,384 – Cash collateral received – – 43 – Deferred income 485 – 203 – Capital creditors 174 – 67 – Other payables 381 45 289 4

Accruals Financial Statements Commodity costs 1,032 – 1,244 – Transportation, distribution and metering costs 146 – 70 – Operating and other accruals 528 – 494 – 1,706 – 1,808 – 3,530 45 3,794 4 Non-financial liabilities: Other payables and accruals 327 31 381 60

Deferred income 98 6 220 3 Shareholder Information 3,955 82 4,395 67

(i) Restated to reflect the change in British Gas Services Limited’s revenue recognition policy, as explained in note 2. The 2008 trade and other payables have been restated by £31 million as a result of this policy change.

2009 2008 Maturity analysis of financial liabilities within trade and other payables on an undiscounted basis £m £m Less than 90 days 3,046 3,683 90–182 days 249 35 183–365 days 235 76 3,530 3,794 Greater than 365 days 45 4 3,575 3,798

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26. Bank overdrafts, loans and other borrowings

2009 2008

Interest rate Principal Current Non-current Total Current Non-current Total % m £m £m £m £m £m £m Bank overdrafts and loans 63 384 447 52 429 481 Bonds (by maturity date) 9 March 2009 4.129 £250 – – – 253 – 253 2 November 2012 6.103 £400 – 415 415 – 416 416 27 February 2013 1.045 ¥3,000 – 21 21 – 23 23 9 December 2013 7.307 €750 – 678 678 – 718 718 4 November 2014 (i) Floating $100 – 62 62 – – – 10 December 2014 (ii) 5.297 £350 – 353 353 – – – 24 October 2016 5.706 £300 – 311 311 – 316 316 19 September 2018 (iii) 7.038 £400 – 428 428 – 340 340 10 March 2022 (iv) 6.565 £400 – 414 414 – – – 4 September 2026 (v) 6.400 £150 – 149 149 – 153 153 19 September 2033 (vi) 7.100 £770 – 777 777 – 447 447 – 3,608 3,608 253 2,413 2,666 Other borrowings 12 December 2011 (vii) Floating £250 – 250 250 – – – Commercial paper – – – 4 – 4 Obligations under finance leases 23 352 375 21 376 397 86 4,594 4,680 330 3,218 3,548

(i) Issued for $100 million on 4 November 2009. (ii) Issued for £250 million on 10 March 2009 and increased by £50 million on 24 March 2009 and by an additional £50 million on 17 April 2009. (iii) Principal amount was increased by £100 million on 29 January 2009. (iv) Issued on 10 March 2009. (v) Fixed at 6.40%. Previously floating but capped at 6.854%. (vi) Principal amount was increased by £150 million on 20 February 2009, by £70 million on 1 April 2009 and by £100 million on 8 June 2009. (vii) Redeemed on 12 February 2010, as explained in note 42.

Minimum lease Capital element of Minimum lease Capital element of payments lease payments payments lease payments 2009 2009 2008 2008 Future finance lease commitments: £m £m £m £m Amounts payable: Within one year 44 23 44 21 Between one and five years 183 115 181 107 After five years 283 237 330 269 510 375 555 397 Less future finance charges (135) (158) Present value of lease obligations 375 397

2009 2008 (restated) Maturity profile of the Group’s borrowings including interest and principal: £m £m Within one year (i) 326 541 Between one and five years 3,080 2,159 After five years 4,038 2,849 7,444 5,549 Interest payments (2,764) (2,001) 4,680 3,548

(i) Borrowings include amounts repayable on demand of £28 million (2008: £35 million).

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27. Deferred and current corporation tax liabilities and assets Review – Business Report Directors’ The following are the major deferred tax liabilities and assets recognised by the Group and movements thereon during the current and prior reporting periods:

Accelerated tax Retirement Other timing depreciation Deferred Decommissioning Deferred benefit Accelerated tax differences (petroleum corporation tax (petroleum corporation tax obligation and depreciation including losses Marked-to- revenue tax) effect thereon revenue tax) effect thereon other provisions (corporation tax) carried forward market Total £m £m £m £m £m £m £m £m £m 1 January 2008 167 (84) (86) 43 28 807 (201) (105) 569 Changes to tax rates – – – – – (1) – – (1) Charge/(credit) to income 42 (21) (94) 47 53 63 19 (441) (332) Credit to equity – – – – (111) – – (97) (208) Acquisition of subsidiary – – – – – 148 (1) – 147 Exchange and other adjustments – – – – – 19 (10) (47) (38) 31 December 2008 209 (105) (180) 90 (30) 1,036 (193) (690) 137 Charge/(credit) to income: – Governance Report Directors’ Continuing operations (28) 14 4 (2) 113 66 (92) 4 79 Discontinued operations – – – – – 32 – (21) 11 Charge/(credit) to equity – – – – (241) – (10) 12 (239) Transfer to assets held for sale (i) – – – – – 3 – – 3 Acquisition of subsidiaries – – – – – 1,070 (120) 18 968 Disposal of subsidiaries – – – – – (383) – 41 (342) Exchange and other adjustments – – – – – 5 (2) 25 28 31 December 2009 181 (91) (176) 88 (158) 1,829 (417) (611) 645

(i) During 2009, European operations (excluding Germany) have been treated as discontinued operations (note 38) and hence provisions for current and deferred taxes are no longer included within Group deferred and current corporation tax liabilities and assets at year end.

Certain deferred tax assets and liabilities have been offset where there is a legally enforceable right to offset current tax assets against Financial Statements current tax liabilities and when the deferred income taxes relate to the same fiscal authority. The following is an analysis of the deferred tax balances (after offset) for financial reporting purposes:

2009 2008 £m £m Deferred tax liabilities 1,179 448 Deferred tax assets (534) (311) 645 137

The following is an analysis of the deferred tax balances before offset: Shareholder Information

2009 2008 £m £m Deferred tax assets crystallising within one year (329) (423) Deferred tax assets crystallising after one year (1,058) (890) (1,387) (1,313) Offset against deferred tax liabilities 853 1,002 Net deferred tax assets (534) (311) Deferred tax liabilities crystallising within one year 107 58 Deferred tax liabilities crystallising after one year 1,925 1,392 2,032 1,450 Offset against deferred tax assets (853) (1,002) Net deferred tax liabilities 1,179 448

At the balance sheet date the Group had certain deductible temporary differences of £148 million (2008: £178 million) available for utilisation against future profits. No deferred tax asset has been recognised in respect of these temporary differences, due to the unpredictability of future profit streams. These assets may be carried forward indefinitely. At the balance sheet date, temporary differences of £76 million (2008: £76 million) existed in respect of the Group’s overseas investments. The deferred tax liability arising on these temporary differences is estimated to be £3 million (2008: £3 million), which has been provided for.

Current tax assets of £69 million (2008: £39 million) include £36 million (2008: £20 million) of recoverable petroleum revenue tax.

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28. Provisions for other liabilities and charges

Acquisitions Unused and Transferred Current provisions for other 1 January and Charged in reversed in (to)/from 31 December 2009 disposals the year the year non-current Utilised 2009 liabilities and charges £m £m £m £m £m £m £m Restructuring costs (i), (ii) 22 – 54 (8) 13 (25) 56 Decommissioning costs (iii) – – 1 – 2 (3) – Purchase contract loss provision (iv) – – 146 – 1 (41) 106 Other (v) 7 24 3 6 (6) (3) 31 29 24 204 (2) 10 (72) 193

Acquisitions Unused and Transfers to Transferred Non-current provisions for other 1 January and Charged in reversed in Revisions and assets held (to)/from Exchange 31 December 2009 disposals the year the year additions for sale current adjustments 2009 liabilities and charges £m £m £m £m £m £m £m £m £m Restructuring costs (i), (ii) 34 – 2 – – – (13) (1) 22 Decommissioning costs (iii) 769 260 22 – 88 (89) (2) 4 1,052 Purchase contract loss provision (iv) – – 108 – – – (1) 1 108 Renegotiation provisions (vi) 27 – – – – – – – 27 Other (v) 35 14 3 (2) – (16) 6 – 40 865 274 135 (2) 88 (105) (10) 4 1,249

2009 2008 Financial and non-financial liabilities within provisions for other liabilities Current Non-current Current Non-current and charges £m £m £m £m Financial liabilities: Restructuring costs (i), (ii) 55 19 20 34 Renegotiation provisions (vi) – 27 – 27 Other (v) 31 25 7 18 86 71 27 79 Non-financial liabilities: Restructuring costs (i), (ii) 1 3 2– Decommissioning costs (iii) – 1,052 – 769 Purchase contract loss provision (iv) 106 108 – – Other (v) – 15 – 17 107 1,178 2 786 193 1,249 29 865

Maturity analysis for financial liabilities within provisions for other 2009 2008 liabilities and charges on an undiscounted basis £m £m Within one year 86 27 Between one and two years 7 19 Between two and five years 54 53 After five years 10 7 157 106

(i) The brought forward restructuring provisions relate to significant restructuring programmes undertaken to achieve the Group’s stated cost reduction targets. Included within the provision are costs related to surplus properties of £39 million (2008: £50 million) estimated with reference to the expected cost to be incurred to the point of lease termination, including costs for dilapidations and sub-letting. The provisions are expected to be utilised between 2010 and 2022. (ii) The amounts charged in the year relate to the UK restructuring costs recognised in 2009, as explained in note 8. (iii) Provision has been made for the estimated net present cost of decommissioning gas production and storage facilities at the end of their useful lives. The estimate has been based on proven and probable reserves, price levels and technology at the balance sheet date. The timing of decommissioning payments is dependent on the lives of the facilities but is anticipated to occur between 2010 and 2050, with the substantial majority of the provision being utilised between 2015 and 2030. The charge to income includes £18 million of notional interest (2008: £20 million). (iv) The purchase contract loss provision relates to an onerous gas procurement contract and North American wind farm power purchase agreements, as explained in note 8. (v) Other provisions include outstanding litigation for a number of items (none of which are individually significant) and provision for National Insurance payable in respect of Long Term Incentive Scheme liabilities. The National Insurance provision was based on a share price of 281.10 pence at 31 December 2009 (2008: 266.00 pence) and is expected to be utilised between 2010 and 2015. (vi) In previous years, the Group renegotiated certain long-term take-or-pay contracts which would have resulted in commitments to pay for gas that would be in excess of requirements and/or at prices above likely market rates. The provision represents the net present cost of estimated payments due to suppliers as consideration for the renegotiations, most of which was settled in 2008, based on the reserves in a group of third-party fields.

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29. Fair value of financial instruments Review – Business Report Directors’ The fair value of a financial instrument is the amount at which the financial instrument could be exchanged in an arm’s length transaction between knowledgeable and willing parties under no compulsion to act. The Group has documented internal policies for determining fair value, including methodologies used to establish valuation adjustments required for credit risk.

The fair values of the Group’s financial instruments, together with the carrying amounts included in the Balance Sheet are analysed as follows:

2009 2008 (restated) (i)

Carrying value Fair value Carrying value Fair value Financial assets Notes £m £m £m £m Loans and receivables: Trade and other receivables, net of provisions 21 4,020 4,020 5,114 5,114 Cash and cash equivalents 24 1,294 1,294 2,939 2,939 5,314 5,314 8,053 8,053

Financial assets measured at fair value: – Governance Report Directors’ Derivative financial instruments (i) 22 808 808 2,025 2,025 Securities: Treasury gilts designated at fair value through profit and loss 104 104 – – Available-for-sale financial assets: Debt instruments 118 118 89 89 Equity instruments 28 28 9 9 250 250 98 98

2009 2008 (restated) (i)

Carrying value Fair value Carrying value Fair value Financial liabilities Notes £m £m £m £m

Financial liabilities measured at amortised cost: Financial Statements Trade and other payables 25 (3,575) (3,575) (3,798) (3,798) Bank overdrafts, loans and other borrowings: Bank overdrafts and loans 26 (447) (422) (481) (535) Bonds 26 (3,608) (3,879) (2,666) (2,660) Other borrowings 26 (250) (252) – – Commercial paper 26 – – (4) (4) Obligations under finance leases 26 (375) (375) (397) (397)

Provisions 28 (157) (157) (106) (106) Shareholder Information (8,412) (8,660) (7,452) (7,500) Financial liabilities at fair value: Derivative financial instruments (i) 22 (2,750) (2,750) (4,199) (4,199)

(i) Restated to classify the non-current portions of derivative financial instruments from current assets and liabilities to non-current assets and liabilities. The restated carrying value and fair value of derivative financial instruments in 2007 is £1,088 million (asset) and £1,517 million (liability).

Securities Securities comprise Treasury gilts designated at fair value through profit or loss on initial recognition and available-for-sale financial assets. The fair values of securities are based on quoted market prices, when available. If quoted market prices are not available, fair values are estimated using observable market data.

£3 million of the amounts held as available-for-sale financial assets is ring-fenced within the regulated insurance entity, Centrica Insurance Company Limited, and is not available for use by the rest of the Group (2008: £nil).

Bank overdrafts, loans and other borrowings The fair values of bonds are based on quoted market prices. The fair values of bank loans have been determined by discounting cash flows with reference to relevant market rates of interest. The fair values of overdrafts and commercial paper are assumed to equal their book values due to the short-term nature of these amounts. The fair values of obligations under finance leases have been determined by discounting contractual cash flows with reference to the Group’s cost of borrowing.

Other financial instruments Due to their nature and/or short-term maturity, the fair values of trade and other receivables, cash and cash equivalents, trade and other payables and provisions are estimated to approximate their carrying values.

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29. Fair value of financial instruments continued Derivative financial instruments and energy contracts designated at fair value through profit and loss The fair values of foreign exchange and interest rate derivatives are determined by reference to closing market rates at the balance sheet date. The fair values of energy derivatives are determined using valuation techniques based in part on observable market data and in part on internal estimates not currently supported by observable market data. The extent to which fair values of energy derivatives are based on observable market data is determined by the extent to which the market for the underlying commodity is judged to be active. The Group has judged each of the markets in which it operates as active for the purposes of accounting as follows:

Active period of markets Gas Power Coal Emissions Oil UK (years) 2 2 3 2 3 North America (years) 5 Up to 5 n/a n/a n/a Europe (years) n/a Up to 5 n/a n/a n/a

The fair values of energy contracts within the scope of IAS 39 that settle inside the active period of the market are based on quoted market prices and expected volumes, discounted at a rate of 1% (2008: 3%). The fair values of derivative financial instruments in North America and Europe are based primarily on quoted market prices. In the UK, however, certain energy contracts extend beyond the active period of the market. The fair values of energy contracts that extend beyond the active period of the market are determined by reference in part to published price quotations in active markets, and in part by using valuation techniques based on commodity prices derived using assumptions that are based on internal market expectations and expected volumes, discounted using a discount rate of 3% for 2008.

The net fair value of energy contracts recorded in the Financial Statements determined using valuation techniques based on non-observable market variables at 31 December 2008 was a £272 million liability. The total change in fair value of energy contracts estimated using valuation techniques, based on variables not supported by market prices, recognised in the Income Statement during the year ended 31 December 2008 amounted to a gain of £17 million. While internal market forecasts outside the active period of the market reasonably reflect all factors that market participants would consider in setting a price, these expectations are not currently supportable by active forward market quotes. The fair values of these contracts would change significantly if the assumptions in respect of gas, power, coal, emissions or oil prices were changed to reasonably possible alternatives. The impacts of reasonably possible changes to assumed gas, power, coal, emissions and oil prices on the net fair value of the Group’s derivative financial instruments determined using valuation models based on non-observable market data are as follows:

2008

Reasonably possible Energy price change in variable UK gas (p/therm) +/-14 UK power (£/MWh) +/-10 UK coal (US$/tonne) +/-25 UK emissions (€/tonne) +/-4 UK oil (US$/bbl) +/-15

2008 Increase/(decrease) in fair value £m UK energy prices – increase/(decrease) 179/(175)

The impacts disclosed above result from changing the assumptions used for fair valuing energy contracts in relation to gas, power, emissions, coal and oil prices to reasonably possible alternative assumptions at the balance sheet date. The fair value impacts only concern those contracts entered into which are within the scope of IAS 39 and are marked-to-market based on valuation models using assumptions that are not currently observable in an active market. The sensitivity analysis provided is hypothetical only and should be used with caution, as the impacts provided are not necessarily indicative of the actual impacts that would be experienced because the Group’s actual exposure to market rates is constantly changing as the Group’s portfolio of energy contracts changes. Changes in fair values based on a variation in a market variable cannot be extrapolated as the relationship between the change in market variable and the change in fair value may not be linear.

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29. Fair value of financial instruments continued Review – Business Report Directors’ Where the fair value at initial recognition for such contracts differs from the transaction price, a day-one gain or loss will arise. Such gains and losses are deferred and amortised to the Income Statement based on volumes purchased or delivered over the contractual period until such time as observable market data becomes available (see note 2 for further detail). The amount that has yet to be recognised in the Income Statement relating to the difference between the fair value at initial recognition (the transaction price) and the amount that would have arisen had valuation techniques used for subsequent measurement been applied at initial recognition, less subsequent releases, is as follows:

2009 2008 Net deferred (gains)/losses £m £m 1 January 51 (166) Net (gains)/losses deferred on new transactions (74) 128 Recognised in the Income Statement during the period (63) 89 31 December (86) 51

Fair value hierarchy – Governance Report Directors’ Financial assets and financial liabilities measured at fair value are classified into one of three categories:

Level 1 Fair value is determined using observable inputs that reflect unadjusted quoted market prices for identical assets and liabilities, for example exchange-traded commodity contracts valued using close-of-day settlement prices. The adjusted market price used for financial assets held by the Group is the current bid price.

Level 2 Fair value is determined using significant inputs that may be either directly observable inputs or unobservable inputs that are corroborated by market data, for example over-the-counter energy contracts within the active period valued using broker quotes or third-party pricing services and foreign exchange or interest rate derivatives valued using quotes corroborated with market data.

Level 3

Fair value is determined using significant unobservable inputs that are not corroborated by market data and may be used with internally- Financial Statements developed methodologies that result in management’s best estimate of fair value, for example energy contracts within the inactive period valued using in-house valuation techniques. Shareholder Information

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29. Fair value of financial instruments continued The fair value hierarchy of financial assets and liabilities measured at fair value as at 31 December 2009 was as follows:

Level 1 Level 2 Level 3 Total £m £m £m £m Financial assets Derivative financial instruments: Energy derivatives 46 550 64 660 Interest rate derivatives – 72 – 72 Foreign exchange derivatives 2 74 – 76 Treasury gilts designated at fair value through profit and loss 104 – – 104 Debt instruments 62 56 – 118 Equity instruments 17 – 11 28 Total financial assets 231 752 75 1,058

Financial liabilities Derivative financial instruments: Energy derivatives (198) (1,954) (490) (2,642) Interest rate derivatives – (15) – (15) Foreign exchange derivatives – (93) – (93) Total financial liabilities (198) (2,062) (490) (2,750)

There were no significant transfers out of Level 1 into Level 2 and out of Level 2 into Level 1 during 2009.

The reconciliation of the Level 3 fair value measurements during the period is as follows:

Equity instruments Energy derivatives 2009 £m £m £m Level 3 financial assets 1 January 3 399 402 Total realised and unrealised losses recognised in profit or loss – (247) (247) Transfers from Level 3 to Level 2 – (88) (88) Acquisitions 8 – 8 31 December 11 64 75 Total gains for the period for Level 3 financial assets held at the end of the reporting period – 64 64

Gains or losses for the period (above) are presented in the Income Statement and Statement of Other Comprehensive Income as follows:

Exceptional items Other and certain comprehensive re-measurements income Total £m £m £m Total losses for the period (247) – (247) Total gains for the period for assets held at the end of the reporting period 64 – 64

Energy derivatives 2009 £m £m Level 3 financial liabilities 1 January (568) (568) Total realised and unrealised losses: Recognised in profit or loss (54) (54) Recognised in other comprehensive income (9) (9) Transfers from Level 3 to Level 2 141 141 31 December (490) (490) Total losses for the period for Level 3 financial liabilities held at the end of the reporting period (490) (490)

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29. Fair value of financial instruments continued Review – Business Report Directors’ Losses for the period (above) are presented in the Income Statement and Statement of Other Comprehensive Income as follows:

Exceptional items Other and certain comprehensive re-measurements income Total £m £m £m Total losses for the period (54) (9) (63) Total losses for the period for liabilities held at the end of the reporting period (484) (6) (490)

The impacts of reasonably possible changes to assumed gas, power, coal, emissions and oil prices on the net fair value of the Group’s fair value measurements categorised as Level 3 are as follows:

2009

Reasonably possible Energy price change in variable UK gas (p/therm) +/-10 Directors’ Report – Governance Report Directors’ UK power (£/MWh) +/-5 UK coal (US$/tonne) +/-20 UK emissions (€/tonne) +/-3 UK oil (US$/bbl) +/-19

2009 Increase/(decrease) in fair value £m UK energy prices – increase/(decrease) 17/(17)

The impacts disclosed above result from changing the assumptions used for fair valuing energy contracts in relation to gas, power, emissions, coal and oil prices to reasonably possible alternative assumptions at the balance sheet date. The fair value impacts only concern those contracts entered into which are within the scope of IAS 39 and are marked-to-market based on valuation models using Financial Statements assumptions that are not currently observable in an active market. The sensitivity analysis provided is hypothetical only and should be used with caution, as the impacts provided are not necessarily indicative of the actual impacts that would be experienced because the Group’s actual exposure to market rates is constantly changing as the Group’s portfolio of energy contracts changes. Changes in fair values based on a variation in a market variable cannot be extrapolated as the relationship between the change in market variable and the change in fair value may not be linear. 30. Called up share capital

2009 2008 £m £m Shareholder Information Authorised share capital of the Company 14 14 (i) 9,000,000,000 ordinary shares of 6 /81p each (2008: 7,000,000,000 ordinary shares of 6 /81p each) 556 432 100,000 cumulative redeemable preference shares of £1 each (2008: 100,000 shares of £1 each) – – Allotted and fully paid share capital of the Company 14 14 5,132,054,073 ordinary shares of 6 /81p each (2008: 5,107,658,569 ordinary shares of 6 /81p each) 317 315

The movement in allotted and fully paid share capital of the Company for the year was as follows:

2009 2008 Number Number 1 January 5,107,658,569 3,679,980,311 Rights Issue (ii) – 1,392,789,173 Issued under employee share schemes (iii) 24,395,504 34,889,085 31 December 5,132,054,073 5,107,658,569

(i) At a General Meeting of the Company held on 11 May 2009, the authorised share capital of the Company was increased from £432 million to £556 million by the creation of 2,000,000,000 ordinary 14 shares of nominal value of 6 /81 pence each, forming a single class with the existing ordinary shares. (ii) On 31 October 2008, the Company announced a Rights Issue, which was approved by shareholders on 21 November 2008, on the basis of three new ordinary shares for every eight ordinary shares 14 held at 160 pence per share, all with a nominal value of 6 /81 pence each. The Company raised proceeds of approximately £2,164 million, net of issue costs of approximately £65 million. The last day for acceptance was 12 December 2008 and dealing in new ordinary shares fully paid commenced on the London Stock Exchange on 15 December 2008. (iii) Ordinary shares were allotted and issued to satisfy the exercise of share options, share incentive schemes, the Direct Energy Employee Share Purchase Plan and the matching element of the Share Incentive Plan as follows:

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30. Called up share capital continued

2009 2008 Number 24,395,504 34,889,085 Nominal value (£m) 1.5 2.2 Consideration (£m) (net of issue costs of £nil (2008: £nil)) 30 38

The closing price of one Centrica ordinary share on 31 December 2009 was 281.10 pence (2008: 266.00 pence).

Centrica employee share ownership trusts purchase Centrica ordinary shares from the open market and receive newly issued shares to satisfy future obligations of certain employee share schemes. During the year the trusts purchased 1.9 million shares (2008: 1.0 million), received 7.2 million newly allotted shares (2008: 6.5 million) and released 6.8 million shares (2008: 4.5 million shares) to employees on vesting. At 31 December 2009 the trusts held 5.9 million shares (2008: 3.6 million shares) at a carrying amount of £15 million (2008: £10 million). Until such time as the Company’s own shares held by these trusts vest unconditionally, the amount paid for those shares, or the value they were issued at, are held as treasury shares and are deducted from shareholders’ equity. 31. Accumulated other comprehensive (loss)/income

Available- Foreign Actuarial for-sale Cash flow currency gains and revaluation hedging translation losses reserve reserve reserve reserve Total £m £m £m £m £m 1 January 2009 (15) (219) (24) 218 (40) Exchange differences on translation of foreign operations – – 83 – 83 Recycling of foreign exchange on disposal of business – 10 (10) – – Actuarial losses on retirement benefit obligations (note 36) – – – (804) (804) Net gains on revaluation of available-for-sale securities 11 – – – 11 Cash flow hedges: Net fair value losses – (253) – – (253) Transferred to income and expense – 234 – – 234 Transferred to assets and liabilities – (4) – – (4) Taxation on above items (2) (12) (41) 241 186 31 December 2009 (6) (244) 8 (345) (587)

Available- Foreign Actuarial for-sale Cash flow currency gains and revaluation hedging translation losses reserve reserve reserve reserve Total £m £m £m £m £m 1 January 2008 3 51 (14) 506 546 Exchange differences on translation of foreign operations – (19) (10) – (29) Actuarial losses on retirement benefit obligations (note 36) – – – (399) (399) Net losses on revaluation of available-for-sale securities (19) – – – (19) Cash flow hedges: Net fair value losses – (318) – – (318) Transferred to income and expense – (30) – – (30) Transferred to assets and liabilities – 1 – – 1 Taxation on above items 1 96 – 111 208 31 December 2008 (15) (219) (24) 218 (40)

Foreign currency translation reserve The foreign currency translation reserve comprises exchange translation differences on foreign currency net investments, offset by exchange translation differences on borrowings and derivatives classified as net investment hedges under the requirements of IAS 39. Exchange losses of £22 million (2008: £175 million gains) on net investments in overseas undertakings have been offset in reserves against exchange gains of £105 million (2008: £185 million losses) on foreign currency borrowings and other instruments used for hedging purposes.

Cash flow hedging reserve The cash flow hedging reserve comprises fair value movements on instruments designated as cash flow hedges under the requirements of IAS 39. Note 23 provides further detail on cash flow hedging.

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31. Accumulated other comprehensive (loss)/income continued Review – Business Report Directors’

2009 2008 Analysis of transfers from cash flow hedging reserve to Income Statement by line item £m £m Gross (loss)/profit (235) 30 Net interest income 1 – (234) 30

The maturity analysis of amounts included in the cash flow hedging reserve, which includes fair value gains and losses in relation to commodity, interest rate and currency hedges, is as follows:

2009 2008 £m £m Within one year (173) (147) Between one and five years (75) (79) After five years 4 7

(244) (219) – Governance Report Directors’

The maturity profile reflects the timing of expected transfers from the cash flow hedging reserve to the Income Statement as and when the hedged item affects the Income Statement which is, for the most part, on delivery of physical volumes for energy contracts and the accrual of interest for debt contracts. 32. Other equity

Share-based Capital Revaluation Treasury payments Merger redemption reserve shares reserve reserve reserve Total £m £m £m £m £m £m 1 January 2009 10 (10) 66 467 16 549 Employee share schemes: Increase in treasury shares – (7) – – – (7)

Exercise of awards – 2 (30) – – (28) Financial Statements Value of services provided – – 38 – – 38 Reclassification as subsidiary 144 – – – – 144 Disposal of subsidiaries (126) – – – – (126) Taxation on above items – – 12 – – 12 Exchange adjustments (2) – 1 – – (1) 31 December 2009 26 (15) 87 467 16 581

Share-based Capital Shareholder Information Revaluation Treasury payments Merger redemption reserve shares reserve reserve reserve Total £m £m £m £m £m £m 1 January 2008 10 (2) 51 467 16 542 Employee share schemes: Increase in treasury shares – (9) – – – (9) Exercise of awards – 1 (25) – – (24) Value of services provided – – 40 – – 40 Rights Issue – – – 2,078 – 2,078 Transfer – – – (2,078) – (2,078) 31 December 2008 10 (10) 66 467 16 549

Merger reserve On 17 February 1997, BG plc (formerly British Gas plc) demerged certain businesses (grouped together under GB Gas Holdings Limited (GBGH)) to form Centrica plc. Prior to demerger, the companies comprising the Centrica businesses were transferred to GBGH, a subsidiary undertaking of BG plc. Upon demerger, the share capital of GBGH was transferred to Centrica plc and was recorded at the nominal value of shares issued to BG plc shareholders. In accordance with sections 131 and 133 of the Companies Act 1985, no premium was recorded on the shares issued. On consolidation, the difference between the nominal value of the Company’s shares issued and the amount of share capital and share premium of GBGH at the date of demerger was credited to a merger reserve.

On 15 December 2008, a Rights Issue was completed and 1,392,789,173 new ordinary shares with an aggregate nominal value of approximately £86 million were issued for cash consideration of £2,164 million, net of issue costs of £65 million. The Rights Issue was effected through a structure which resulted in a merger reserve arising under section 131 of the Companies Act 1985. Centrica plc issued shares in exchange for shares in Centrica CB Limited, which subsequently redeemed its no par value redeemable preference shares for cash. Following the receipt of the cash proceeds through the structure, the excess of the net proceeds received over the nominal value of the share capital issued has been transferred from the merger reserve to retained earnings.

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32. Other equity continued Capital redemption reserve In accordance with section 170 (1) of the Companies Act 1985, the Company transferred to the capital redemption reserve an amount equal to the nominal value of shares repurchased and subsequently cancelled.

Revaluation reserve During 2005 the revaluation of the Group’s existing interest in Centrica SHB Limited to fair value, following the acquisition by the Group of the remaining 40% stake in the company, was recorded as a revaluation reserve adjustment. During 2009 the revaluation of the Group’s existing interest in Segebel S.A. and producing gas and oil assets located in Alberta, Canada, following the acquisition by the Group of additional interests (note 37), was recorded as a revaluation reserve adjustment. The subsequent disposal of Segebel S.A. (note 38) resulted in a transfer of the revaluation gain relating to this investment to retained earnings.

Treasury shares reserve The treasury shares reserve reflects the cost of shares in the Company held in share-based payment plans to meet future obligations to deliver shares to employees on vesting.

Share-based payments reserve The share-based payments reserve reflects the obligation to deliver shares to employees under the Group’s share schemes in return for services provided. 33. Minority interests

2009 2008 £m £m 1 January 60 59 Acquisition of new business (i) 802 – Profit on ordinary activities after taxation 12 1 Accumulated other comprehensive income 1 – Purchase of minority interests (i) (201) – Dividends paid (11) – Disposal of business (i) (589) – Exchange adjustments (11) – 31 December 63 60

(i) Includes minority interests relating to the acquisition of Venture Production plc (Venture) which were eliminated from 9 November 2009 when Venture became a wholly owned subsidiary of the Group and minority interests relating to the acquisition and subsequent disposal of Segebel S.A. Minority interests at 31 December 2009 relate primarily to a 30% economic interest (2008: 30%) held by Lloyds TSB Bank plc in GF Two Limited (formerly Goldfish Holdings Limited) and its subsidiary, GF One Limited (formerly Goldfish Bank Limited).

Minority interests’ share of profit from operations after taxation can be analysed as follows:

2009 2008 Exceptional Exceptional Business items and certain Results for Business items and certain Results for performance re-measurements the year performance re-measurements the year £m £m £m £m £m £m Continuing operations 2 – 2 1 – 1 Discontinued operations 48 (38) 10 – – – 50 (38) 12 1 – 1

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34. Notes to the Group Cash Flow Statement Review – Business Report Directors’

2009 2008 (restated) (i) (a) Reconciliation of Group operating profit to net cash flow from operating activities £m £m Continuing operations Group operating profit including share of result of joint ventures and associates 1,175 661 Less share of profits of joint ventures and associates (1) (9) Group operating profit before share of profits of joint ventures and associates 1,174 652 Add back/(deduct): Amortisation and write-down of intangible assets 209 117 Depreciation and write-down of property, plant and equipment 708 513 Employee share scheme costs 38 35 Profit on sale of businesses (54) – Movement in provisions 301 (7) Pension service cost 74 109 Pension contributions (403) (240) – Governance Report Directors’ Re-measurement of energy contracts (ii) 135 1,302 Unrealised foreign exchange losses/(gains) on operating cash and cash equivalents 1 (3) Operating cash flows before movements in working capital 2,183 2,478 Decrease/(increase) in inventories 35 (143) Decrease/(increase) in trade and other receivables (iii) 781 (1,312) Increase in trade and other payables (iii) 83 372 Cash generated from continuing operations 3,082 1,395 Income taxes paid (329) (374) Net petroleum revenue tax paid (174) (533) Interest received 13 23 Interest paid (3) (47) Financial Statements Payments relating to exceptional charges (203) (74) Net cash flow from continuing operating activities 2,386 390 Discontinued operations Operating loss including share of result of joint ventures and associates (46) (203) Less share of loss/(profit) of joint ventures and associates 2 (3) Operating loss before share of joint ventures and associates (44) (206) Add back/(deduct): Amortisation and write-down of intangible assets 41 57 Shareholder Information Depreciation and write-down of property, plant and equipment 25 2 Movement in provisions 25 (3) Re-measurement of energy contracts 49 67 Operating cash flows before movements in working capital 96 (83) Decrease in inventories 7 – Decrease/(increase) in receivables 337 (63) (Decrease)/increase in payables (168) 53 Income taxes paid (10) – Interest paid (1) – Net cash flow from discontinued operating activities 261 (93) Net cash flow from operating activities 2,647 297

(i) Restated to present the European Energy segment, with the exception of the Group’s operations in Germany, as a discontinued operation, as explained in note 38 and to reflect the change in British Gas Services Limited’s revenue recognition policy, as explained in note 2. (ii) Adds back unrealised losses arising from re-measurement of energy contracts, including those related to proprietary trading activities. (iii) Includes net outflow of £79 million of cash collateral in 2009 (2008: net outflow of £556 million).

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34. Notes to the Group Cash Flow Statement continued

2009 2008 (b) Net debt £m £m Current borrowings (note 26) (86) (330) Non-current borrowings (note 26) (4,594) (3,218) Less: Cash and cash equivalents 1,294 2,939 Securities – current 74 63 Securities – non-current 176 35 (3,136) (511)

2009 2008 (c) Reconciliation of net increase in cash and cash equivalents to movement in net debt £m £m Net (decrease)/increase in cash and cash equivalents (1,569) 1,778 Cash and cash equivalents of disposal groups classified as held for sale (19) – (1,588) 1,778 Add back/(deduct): Net purchase of securities 128 22 Cash inflow from additional debt (1,887) (1,513) Cash outflow from payment of capital element of finance leases 22 20 Cash outflow from repayment of other debt 872 175 (2,453) 482 Revaluation of: Securities 14 (19) Loans and other borrowings 15 (82) (2,424) 381 Increase in interest payable on loans and other borrowings (25) (9) Acquisitions (477) (19) Disposals 298 – Exchange adjustments 4 (72) Other non-cash movements (1) 3 Movement in net debt (2,625) 284 Net debt at 1 January (511) (795) Net debt at end of period (3,136) (511)

North 2008 UK America Other 2009 (restated) (i) (d) Relationship between current tax charge and taxes paid £m £m £m £m £m Current tax charge: Corporation tax 154 (9) 13 158 408 Petroleum revenue tax 112 – – 112 517 266 (9) 13 270 925 Taxes paid: Corporation tax 245 29 55 329 374 Petroleum revenue tax 174 – – 174 533 419 29 55 503 907

(i) Restated to present the European Energy segment, with the exception of the Group’s operations in Germany, as a discontinued operation (note 38). Differences between current tax charged and taxes paid arose principally due to the following factors:

• UK corporation tax is paid, based on estimated profits, partly during the year and partly in the following year. Fluctuations in profits from year to year may therefore give rise to divergence between the charge for the current year and taxes paid; and • petroleum revenue tax payments are based on income realised in the preceding period, with subsequent adjustments to reflect actual profits. Variations in production from period to period may therefore lead to temporary differences between tax charged and tax paid.

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35. Share-based payments Review – Business Report Directors’ Employee share schemes are designed to encourage participants to align their objectives with those of shareholders. Centrica operates nine main employee share schemes: the Deferred and Matching Share Scheme (DMSS), the Executive Share Option Scheme (ESOS), the Long Term Incentive Scheme (LTIS), the Sharesave Scheme (Sharesave), the Share Award Scheme (SAS), the Restricted Share Scheme (RSS), the Share Incentive Plan (SIP), the Direct Energy Employee Share Purchase Plan (ESPP) and the Deferred Bonus Plan 2009 (DBP).

On 15 December 2008, the Company raised proceeds of £2,164 million, net of issue costs of £65 million, through a Rights Issue as explained in notes 30 and 32. The number of shares allocated to employees under the Group’s share schemes has been adjusted to reflect the bonus element of the Rights Issue. The terms of the Group’s employee share schemes were adjusted such that participants of the various plans were no better or worse off as a result of the Rights Issue. Consequently, no additional expense was or will be recognised as a result of changes to the Group’s employee share schemes. Details of the adjustments made to the terms of the Group’s employee share schemes as a result of the Rights Issue are provided in sections (b) and (c) below.

(a) Summary of share-based payment plans and movements in the number of shares and options outstanding

DMSS – Governance Report Directors’ Awards under the DMSS are generally reserved for employees within the senior executive group. The scheme operates over a four-year vesting period. Under normal conditions the grant date of the scheme is the first day of each bonus year. This is followed by a vesting period of four years, being the bonus year plus a three-year performance period. The fair value of the award reflects the market value of the shares at the grant date. The scheme comprises three separate elements:

(i) Deferred shares The scheme requires participants to defer between 20% and 40% of their annual pre-tax bonus into the scheme. The shares are held in trust over the three-year performance period, during which time they cannot be withdrawn. An employee who leaves prior to the vesting date will forfeit their right to the shares (except where permitted by the rules of the scheme). All shares held in trust will be eligible to receive dividends. The number of shares deferred is estimated from the participant’s maximum bonus and the likelihood of bonus payout in the bonus year. Subsequent revisions are made based on the actual bonus paid in the year.

(ii) Investment shares

The scheme allows participants to elect to invest an additional amount of their annual bonus into the scheme up to a maximum of 50% Financial Statements of their total potential after-tax bonus for the year. This 50% limit includes the amount automatically deferred each year pre-tax. The number of shares invested is estimated based on the maximum bonus in year one. The shares may be funded directly from the employee (or through a release of the employee’s LTIS shares at the Company’s discretion), and thus the shares do not attract an IFRS 2 charge. Subsequent to the bonus year, the shares are held in trust over the three-year performance period and will vest unconditionally. Participants can withdraw the investment shares unconditionally at any point throughout the vesting period, although the related matching shares will be forfeited. The shares are eligible to receive dividends.

(iii) Matching shares Deferred and investment shares will be matched with conditional matching shares, which will be released upon the achievement, over a three-year performance period, of three-year Group Economic Profit performance targets. Group Economic Profit is calculated by Shareholder Information taking Group operating profit before exceptional items and certain re-measurements after tax and subtracting a charge for capital employed based on the Group’s weighted average cost of capital. The number of matching shares that will vest will be determined on a straight-line basis from a zero match for no growth in Economic Profit up to a two-times match for growth of 25% or more. The number of investment matching shares, subject to the performance conditions, is grossed up to reflect the impact of tax and employees’ National Insurance contributions. The number of matching shares released following the satisfaction of the performance conditions will be increased to reflect the dividends that would have been paid during the three-year performance period. The likelihood of achieving the performance conditions is taken into account in calculating the number of awards expected to vest. Estimates are made in year one and revised in subsequent years. An employee who leaves prior to the vesting date will forfeit their right to the shares (except where permitted by the rules of the scheme).

The number of shares originally granted and fair value allocated are estimated on the grant date and then adjusted following the announcement of the actual annual performance bonus and subsequent investment by participants. Details of the fair values of awards granted and related assumptions are included in section (c) below. A reconciliation of movements in allocations of deferred and matching shares actually made is shown below:

2009 2008 Number (i) Number (i) Outstanding at start of year 6,564,395 3,393,500 Granted 5,707,931 3,425,689 Forfeited (847,211) (254,794) Outstanding at end of year 11,425,115 6,564,395 Vested at end of year – –

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35. Share-based payments continued ESOS Under the ESOS, the Board may grant options over shares in Centrica plc to employees of the Group. Options are granted with a fixed exercise price equal to the market price of the shares at the legal date of grant which approximates, or is the same as, the grant date for accounting purposes, and are generally reserved for employees within the senior executive group. Options granted under the ESOS will become exercisable in full on the third anniversary of the date of grant, subject to the growth in EPS over that period exceeding RPI growth by 18% or more. The number of options becoming exercisable is determined on a straight-line basis between 40% and 100% if EPS growth exceeds RPI growth by between 9% and 18%. The exercise of options is subject to continued employment within the Group (except where permitted by the rules of the scheme). Performance conditions are non-market based and therefore not included in the fair value calculations. Early exercise has been taken into account by estimating the expected life of the options. Details of the fair values of awards granted and related assumptions are included in section (b) below. A reconciliation of option movements is as follows:

2009 2008

Weighted average Weighted average Number (i) exercise price (i) Number (i) exercise price (i) Outstanding at start of year 17,986,135 £2.09 21,953,085 £2.07 Granted (ii) – – 336,012 £2.56 Exercised (6,242,045) £1.95 (3,199,991) £1.94 Forfeited (564,379) £2.33 (1,102,971) £2.25 Outstanding at end of year 11,179,711 £2.15 17,986,135 £2.09 Exercisable at end of year 11,179,711 £2.15 13,031,276 £1.92

(i) Movements in allocations prior to 14 November 2008 and the corresponding weighted average exercise price have been adjusted to reflect the bonus element of the Rights Issue. Details of the Rights Issue are provided in notes 30 and 32. (ii) Options granted in 2008 relate to a special grant of options that vested and became exercisable immediately. For options outstanding at the end of the year, the range of exercise prices and average remaining life was as follows:

2009 2008

Average remaining Average remaining Range of exercise Weighted average Number contractual life Range of exercise Weighted average Number contractual life prices (i) exercise price (i) of shares (i) Years prices (i) exercise price (i) of shares (i) Years £1.30–£1.39 £1.31 1,255,753 3.2 £1.30–£1.39 £1.31 2,313,157 4.2 £1.90–£1.99 £1.99 1,239,127 4.2 £1.90–£1.99 £1.99 2,264,509 5.2 £2.00–£2.09 £2.03 3,298,350 4.5 £2.00–£2.09 £2.03 6,576,689 5.3 £2.10–£2.19 £2.14 822,921 1.7 £2.10–£2.19 £2.14 1,357,308 2.6 £2.20–£2.29 £2.24 183,601 5.7 £2.20–£2.29 £2.23 183,601 6.7 £2.50–£2.59 £2.54 4,379,959 6.4 £2.50–£2.59 £2.54 5,290,871 7.4 £2.15 11,179,711 4.9 £2.09 17,986,135 5.6

(i) Exercise prices and the number of shares in each range have been adjusted to reflect the bonus element of the Rights Issue. Details of the Rights Issue are provided in notes 30 and 32. For options exercised during the year, the weighted average share price was £2.57 (2008: £2.81). The 2008 share price was adjusted to reflect the bonus element of the Rights Issue.

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35. Share-based payments continued Review – Business Report Directors’ LTIS Under the LTIS, allocations of shares in Centrica plc are generally reserved for employees at senior management level. The number of shares to be released to participants is calculated subject to the Company’s total shareholder return (TSR) and EPS growth during the three years following the grant date. Shares are released to participants immediately following the end of the period in which performance is assessed, however release of shares is subject to continued employment within the Group at the date of release (except where permitted by the rules of the scheme). The vesting of half of each award is made on the basis of TSR performance. For this half of the award, the calculation of TSR performance is compared with the TSR of other shares in the FTSE 100. Allocations are valued using a Monte Carlo simulation model. The number of shares released is determined on a straight-line basis between 25% and 100% if Centrica’s TSR is ranked between 50th and 20th. The vesting of the remaining half of awards is dependent on EPS growth. This is considered a non-market condition under IFRS 2. Additional shares for both TSR and EPS portions are awarded or a cash payment is made to reflect dividends that would have been paid on the allocations during the performance period. The fair value of the awards is therefore considered to be the market value at the grant date. The likelihood of achieving the performance conditions is taken into account in calculating the number of awards expected to vest. Details of the fair values of awards granted and related assumptions are included in section (c) below. A reconciliation of movements in allocations is as follows: Directors’ Report – Governance Report Directors’ 2009 2008 Number (i) Number (i) Outstanding at start of year 26,497,144 22,272,975 Granted 13,110,621 13,026,508 Released (6,318,952) (3,882,647) Forfeited – performance related (1,084,261) (2,649,148) Forfeited – non-performance related (2,236,299) (2,270,544) Outstanding at end of year 29,968,253 26,497,144 Vested at end of year 82,632 264,143

Sharesave Under Sharesave, the Board may grant options over shares in Centrica plc to all UK-based employees of the Group. To date, the Board has approved the grant of options with a fixed exercise price equal to 80% of the average market price of the shares for the three days prior to invitation which is three to four weeks prior to the grant date. Employees pay a fixed amount from salary into a savings account each month, and may elect to save over three and/or five years. At the end of the savings period, employees have six months in which to exercise their options using the funds saved. If employees decide not to exercise their options, they may withdraw the funds saved, and the options expire six months after maturity. Exercise of options is subject to continued employment within the Group (except where permitted by the rules of the scheme). Details of the fair values of awards granted and related assumptions are included in section (b) Shareholder Information below. A reconciliation of movements in allocations is as follows:

2009 2008

Weighted average Weighted average Number (i) exercise price (i) Number (i) exercise price (i) Outstanding at start of year 38,186,565 £2.20 57,663,048 £1.58 Granted 25,102,695 £1.94 15,823,636 £2.27 Exercised (8,881,843) £1.98 (30,637,590) £1.08 Forfeited (8,376,276) £2.27 (4,603,041) £1.76 Expired (377,764) £2.03 (59,488) £1.28 Outstanding at end of year 45,653,377 £2.09 38,186,565 £2.20 Exercisable at end of year 15,546 £2.05 144,015 £1.13

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35. Share-based payments continued For options outstanding at the end of the year, the range of exercise prices and the average remaining life was as follows:

2009 2008

Average remaining Average remaining Range of Weighted average Number contractual life Range of Weighted average Number contractual life exercise prices (i) exercise price (i) of shares (i) Years exercise prices (i) exercise price (i) of shares (i) Years £0.90–£0.99 – – – £0.90–£0.99 £0.95 109,440 – £1.60–£1.69 £1.67 3,181,119 0.3 £1.60–£1.69 £1.66 5,731,196 0.9 £1.90–£1.99 £1.94 23,817,369 3.3 £1.90–£1.99 – – – £2.10–£2.19 £2.12 2,669,773 1.4 £2.10–£2.19 £2.12 9,801,088 2.3 £2.20–£2.29 £2.27 10,213,684 2.3 £2.20–£2.29 £2.27 14,930,249 4.3 £2.50–£2.59 £2.59 5,771,432 1.1 £2.50–£2.59 £2.59 7,614,592 3.3 £2.09 45,653,377 2.5 £2.20 38,186,565 3.0

(i) Exercise prices and the number of shares in each range have been adjusted to reflect the bonus element of the Rights Issue. Details of the Rights Issue are provided in notes 30 and 32. For options exercised during the year, the weighted average share price at the date of exercise was £2.36 (2008: £2.64). The 2008 share price was adjusted to reflect the bonus element of the Rights Issue.

SAS Under the SAS, allocations of shares in Centrica plc are made to selected employees at middle management levels, based on recommendation by the Chief Executive and the Group Director, Human Resources. There is no contractual eligibility for SAS and each year’s award is made independently from previous awards. Allocations are subject to no performance conditions and vest unconditionally subject to continued employment within the Group (except where permitted by the rules of the scheme) in two stages – half of the award vesting after two years, the other half vesting after three years. On vesting, additional shares are awarded or a cash payment is made to reflect dividends that would have been paid on the allocations during the vesting period. The fair value is therefore considered to be the market value at date of grant. Details of the fair values of awards granted and related assumptions are included in section (c) below. A reconciliation of movements in the allocations is as follows:

2009 2008 Number (i) Number (i) Outstanding at start of year 3,606,533 2,768,440 Granted 3,369,583 1,787,004 Released (1,190,691) (685,573) Forfeited (298,292) (263,338) Outstanding at end of year 5,487,133 3,606,533 Vested at end of year – –

RSS Awards under the RSS are normally reserved for certain selected key employees, based on recommendation by the Chief Executive and the Group Director, Human Resources. Neither the Executive Directors nor the next tier of executive management are eligible to participate. There is no contractual eligibility for RSS and each year’s award is made independently from previous awards. Allocations are subject to no performance conditions and vest unconditionally subject to continued employment within the Group (except where permitted by the rules of the scheme) in one or two stages dependent on the individual awards. On vesting, additional shares are awarded or a cash payment is made to reflect dividends that would have been paid on the allocations during the vesting period. The fair value is therefore considered to be the market value at date of grant. Details of the fair values of awards granted and related assumptions are included in section (c) below.

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35. Share-based payments continued Review – Business Report Directors’ A reconciliation of movements in the allocations is as follows:

2009 2008 Number (i) Number (i) Outstanding at start of year 400,708 408,597 Granted 817,519 32,795 Released (166,897) (40,684) Forfeited (9,791) – Outstanding at end of year 1,041,539 400,708 Vested at end of year – –

(i) Movements in allocations prior to 14 November 2008 have been adjusted to reflect the bonus element of the Rights Issue. Details of the Rights Issue are provided in notes 30 and 32. For shares released during the year, the weighted average share price at the date of release was £2.35 (2008: £2.69). The 2008 share price was adjusted to reflect the bonus element of the Rights Issue. Directors’ Report – Governance Report Directors’ SIP Under SIP, employees in the UK may purchase ‘partnership shares’ through monthly salary deductions. The Company then awards one ‘matching share’ for every two partnership shares purchased, up to a maximum of 22 matching shares per employee per month (increased in 2009 from 20 to 22 matching shares to reflect the bonus element of the Rights Issue). Both partnership shares and matching shares are held in a trust. Partnership shares may be withdrawn at any time, however matching shares are forfeited if the related partnership shares are withdrawn within three years from the original purchase date. Matching shares vest unconditionally for employees after being held for three years in the trust. Vesting of matching shares is also subject to continued employment within the Group (except where permitted by the rules of the scheme). Matching shares are valued at the market price at the grant date. Details of the fair values of awards granted and related assumptions are included in section (c) below.

A reconciliation of matching shares held in trust is as follows:

2009 2008 Number (i) Number (i) (ii) Financial Statements Unvested at start of year 1,773,152 1,785,021 Granted 996,604 730,122 Released (504,163) (637,681) Forfeited (127,116) (104,310) Unvested at end of year 2,138,477 1,773,152

For shares released during the year, the weighted average share price at the date of release was £2.52 (2008: £2.77). The 2008 share Shareholder Information price was adjusted to reflect the bonus element of the Rights Issue. ESPP Under the ESPP, employees in North America may purchase ‘partnership shares’ through salary deductions. The Company then awards one ‘matching share’ for every two partnership shares two years from the date the corresponding partnership shares were purchased. Partnership shares may be withdrawn at any time, however the entitlement to matching shares is forfeited if the related partnership shares are withdrawn within two years from the original purchase date. Awards of matching shares are also subject to continued employment within the Group (except where permitted by the rules of the scheme). Matching shares are valued at the market price at the grant date. Details of the fair values of awards granted and related assumptions are included in section (c) below. A reconciliation of matching shares granted is as follows:

2009 2008 Number (i) Number (i) Unvested at start of year 476,088 383,230 Granted 517,707 287,300 Released (227,078) (151,024) Forfeited (150,174) (43,418) Unvested at end of year 616,543 476,088

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35. Share-based payments continued DBP Awards under the DBP are generally reserved for a selected group of employees. The plan operates over a three-year vesting period. Under normal conditions the grant date of the plan is the first day of each bonus year. This is followed by a vesting period of three years, being the bonus year plus a two-year employment period. The fair value of the award reflects the market value of the shares at the grant date. The plan allows participants to elect to defer up to 100% of their annual bonus into the plan. Bonuses can be deferred on a pre- tax basis (as ‘bonus awards’) or a post-tax basis (as ‘bonus shares’).

Bonus awards do not have entitlements to voting or dividend rights until the shares are transferred to them whereas bonus shares entitle participants to all the rights of a shareholder. Unless it is determined otherwise at grant, an employee who leaves prior to the vesting date will not forfeit their rights to bonus awards (although vesting will usually be accelerated and time-apportioned). Participants can withdraw the bonus shares at any point throughout the vesting period, although the related matching awards will be forfeited.

The Company awards one and a half shares as a ‘matching award’ for every bonus award and bonus share purchased. Matching awards vest unconditionally for employees after being held for two years. Vesting of matching awards is also subject to continued employment within the Group (except where permitted by the rules of the plan). Matching awards are valued at the market price on the grant date.

The number of shares originally granted and fair value allocated are estimated on the grant date and then adjusted following the announcement of the actual annual performance bonus and subsequent investment by participants. Details of the fair values of awards granted under IFRS 2 and related assumptions are included in section (c) below. As 2009 was the first year in which the plan became operational, there were no bonus awards, bonus shares or related matching awards legally granted under the plan.

(b) Fair values and associated details of options granted

Sharesave ESOS

2009 2008 2009 2008 Number of options granted (i) 25,102,695 15,823,636 – 336,012 Weighted average fair value at grant date (i) £0.49 £0.65 – £0.60 Weighted average share price at grant date (i) £2.30 £2.71 – £2.91 Weighted average exercise price (i) £1.94 £2.27 – £2.56 Expected volatility (ii) 29% 23% – 23% Contractual option life 4.3 years 4.4 years – 10 years Expected life 4.3 years 4.1 years – 5 years Vesting period 4 years 4.1 years – – Expected dividend yield 5.00% 3.50% – 4.20% Risk-free interest rate (iii) 2.43% 4.08% – 4.30% Expected forfeitures 31% 32% – 0%

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35. Share-based payments continued Review – Business Report Directors’ (c) Fair values and associated details of shares granted

2009 DMSS LTIS SAS RSS SIP ESPP DBP Number of equity instruments granted 5,031,994 13,110,621 3,369,583 817,519 996,604 517,707 1,750,267 Weighted average fair value at grant date £2.81 £1.65 £2.22 £2.53 £2.45 £2.45 £2.81 Expected performance lapses 0% n/a n/a n/a n/a n/a n/a Expected dividend yield n/a n/a n/a n/a n/a n/a n/a Vesting period 4 years 3 years 2.5 years 1 year 3 years 2 years 3 years Expected volatility (ii) n/a 31% n/a n/a n/a n/a n/a Expected forfeitures 25% 25% 20% 2% 0% 20% 0% Risk-free rate (iii) n/a 2.2% n/a n/a n/a n/a n/a Average volatility of FTSE 100 n/a 31% n/a n/a n/a n/a n/a

Average cross-correlation of FTSE 100 (iv) n/a 39.8% n/a n/a n/a n/a n/a – Governance Report Directors’

2008 DMSS LTIS SAS RSS SIP ESPP DBP Number of equity instruments granted (i) 5,707,931 13,026,508 1,787,004 32,795 730,122 287,300 – Weighted average fair value at grant date (i) £2.27 £2.00 £2.71 £2.47 £2.69 £2.96 – Expected performance lapses 0% n/a n/a n/a n/a n/a – Expected dividend yield n/a n/a n/a n/a n/a n/a – Vesting period 4 years 3 years 2.5 years 3 years 3 years 2 years – Expected volatility (ii) n/a 22% n/a n/a n/a n/a – Expected forfeitures 25% 25% 20% 25% 0% 20% – Risk-free rate (iii) n/a 4.05% n/a n/a n/a n/a –

Average volatility of FTSE 100 n/a 27% n/a n/a n/a n/a – Financial Statements Average cross-correlation of FTSE 100 (iv) n/a 30% n/a n/a n/a n/a –

(i) For options granted prior to 14 November 2008 amounts have been adjusted to take account of the bonus element of the Rights Issue. Details of the Rights Issue are provided in notes 30 and 32. (ii) The expected volatility is based on historical volatility over the last three years. (iii) The risk-free rate of return is the yield on zero-coupon UK Government bonds of a term consistent with the expected option life. (iv) The cross-correlation of the FTSE 100 has been obtained from a model which calculates the correlation between Centrica’s historical share price and each of the remaining FTSE 100 companies over the period commensurate with the performance period of the awards. Shareholder Information

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36. Pensions Pension schemes The majority of the Group’s UK employees at 31 December 2009 were members of one of the three main schemes: the Centrica Pension Scheme, the Centrica Engineers Pension Scheme and the Centrica Pension Plan (formerly known as the Centrica Management Pension Scheme) (together the ‘registered pension schemes’). The Centrica Pension Scheme (final salary section) and the Centrica Pension Plan (a final salary scheme) were closed to new members from 1 April 2003 and 1 July 2003 respectively. The Centrica Pension Scheme also has a career average salary section which was closed to new members with effect from 1 July 2008 and replaced by a defined contribution section which is open to new members. The Centrica Engineers Pension Scheme (final salary section) was closed to new members from 1 April 2006, and a career average salary section was added to the scheme at that date. These schemes are defined benefit schemes and are tax-approved funded arrangements. They are subject to independent valuations at least every three years, on the basis of which the qualified actuary certifies the rate of employer contributions which, together with the specified contributions payable by the employees and proceeds from the schemes’ assets, are expected to be sufficient to fund the benefits payable under the schemes.

On 1 January 2009 the majority of the active members of the Centrica Pension Scheme were transferred to the Centrica Pension Plan, and the liabilities and assets were accordingly transferred with effect from this date. There was no tax effect arising on the transfer. The Centrica Unapproved Pension Scheme is an unfunded arrangement which provides benefits to certain employees whose benefits under the main schemes would otherwise be limited by the earnings cap. The Group also has a commitment to provide certain pension and post-retirement benefits to employees of Direct Energy Marketing Limited (Canada) under a defined benefit scheme.

The latest full actuarial valuations were carried out at the following dates: the registered pension schemes at 31 March 2006, the Unapproved Pension Scheme at 6 April 2008 and the Direct Energy Marketing Limited pension plan at 14 June 2008. These have been updated to 31 December 2009 for the purposes of meeting the requirements of IAS 19. At the balance sheet date the actuarial valuation exercises of the registered pension schemes at 31 March 2009 were in progress, and were completed in February 2010. The data used for the triennial actuarial valuation at 31 March 2009 has been incorporated in the IAS 19 defined benefit obligation of the registered schemes at 31 December 2009. Investments have been valued for this purpose at market value.

Governance The UK-registered pension schemes are managed by trustee companies whose boards consist of both company-nominated and member-nominated directors. Each scheme holds units in the Centrica Combined Common Investment Fund (CCCIF), which holds the combined assets of the participating schemes. The method of allocation of units is set out in the Trust Deed of the CCCIF. The trustee of the CCCIF is a company, Centrica Combined Common Investment Fund Limited (CCCIF Limited) which was incorporated on 23 September 2002. The trustee of the CCCIF may be appointed or removed by the participant schemes. The board of CCCIF Limited is comprised of seven directors; one independent director, three directors appointed by Centrica plc (including the chairman) and one director appointed by each of the three participating schemes. No direct investments are made in securities issued by Centrica plc or any of its subsidiaries, property leased to or owned by Centrica plc or any of its subsidiaries or securities of any fund manager or any of their associated companies.

Under the terms of the Pensions Act 2004, Centrica plc (‘the Company’) and each trustee board must agree the funding rate for its defined benefit pension scheme and a recovery plan to fund any deficit against the scheme-specific statutory funding objective. This approach was first adopted for the triennial valuations completed at 31 March 2006 and was again reflected in the 31 March 2009 valuations. In addition, the Group has a commitment to provide contributions to defined contribution schemes for certain employees in the UK and North America who are not members of one of the Group’s defined benefit pension schemes.

31 December 31 December 2009 2008 Major assumptions used for the actuarial valuation % % Rate of increase in employee earnings 4.8 4.3 Rate of increase in pensions in payment and deferred pensions 3.8 3.3 Discount rate 6.0 6.7 Inflation assumption 3.8 3.3

The assumptions relating to longevity underlying the pension liabilities at the balance sheet date have been based on a combination of standard actuarial mortality tables, scheme experience and other relevant data, and include a medium cohort allowance for future improvements in longevity, as published by the Institute of Actuaries. The assumptions are equivalent to future longevity for members in normal health approximately as follows:

2009 2008

Male Female Male Female Life expectancy at age 65 for a member: Years Years Years Years Currently aged 65 22.5 23.9 20.4 21.8 Currently aged 45 24.3 25.2 21.6 22.9

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36. Pensions continued Review – Business Report Directors’ At 31 March 2009, the date of the most recent actuarial review, the schemes had approximately 34,900 members and beneficiaries. The other demographic assumptions have been set having regard to the latest trends in scheme experience and other relevant data. The assumptions are reviewed and updated as necessary as part of the periodic actuarial valuation of the pension schemes.

2009 2008

Indicative Indicative effect on effect on Increase/ scheme Increase/ scheme decrease in liabilities decrease in liabilities Impact of changing material assumptions assumption % assumption % Rate of increase in employee earnings 0.25% +/-1 0.25% +/-2 Rate of increase in pensions in payment and deferred pensions 0.25% +/-5 0.25% +/-4 Discount rate 0.25% -/+6 0.25% -/+6 Inflation assumption 0.25% +/-6 0.25% +/-6

Longevity assumption 1 year +/-2 1 year +/-2 – Governance Report Directors’

The expected rate of return and market value of the assets and the present value of the liabilities in the schemes at 31 December were:

2009 2008

Expected rate Expected rate of return of return per annum Valuation per annum Valuation % £m % £m UK equities 8.3 1,101 8.5 884 Non-UK equities 8.3 1,106 8.5 996 High-yield debt 6.6 127 – – Fixed-interest bonds 6.0 524 6.3 404 Index-linked gilts 4.5 364 4.3 258 Property 8.0 55 7.2 55 Financial Statements Cash pending investment 6.1 256 6.7 45 Total fair value of plan assets 7.4 3,533 7.7 2,642 Present value of defined benefit obligation (4,098) (2,755) Net liability recognised in the Balance Sheet (565) (113) Associated deferred tax asset recognised in the Balance Sheet 158 30 Net pension liability (407) (83) Net liability recognised in the Balance Sheet comprises: Surpluses – 73 Deficits (565) (186) Shareholder Information (565) (113)

The overall expected rate of return on assets is a weighted average based on the actual plan assets held in each class and the expected returns on separate asset classes less costs of administering the plan and taxes paid by the plan itself. The returns on separate asset classes were derived as follows: the expected rate of return on equities, high-yield debt and property are based on the expected median return over a 10-year period, as calculated by the independent company actuary. The median return over a longer period than 10 years was not expected to be materially dissimilar. The expected rate of return on fixed-interest bonds and index-linked gilts reflects yields directly observable on bond market indices. The expected rate of return on cash pending investment reflects the average rate of return on the actual asset classes that the cash was invested in shortly after the year end.

Included within the schemes’ liabilities above are £31 million (2008: £24 million) relating to unfunded pension arrangements. Included within non-current securities are £48 million (2008: £26 million) of investments, held by the Law Debenture Trust on behalf of the Company, as security in respect of the Centrica Unapproved Pension Scheme. Based on the triennial valuation at 31 March 2009, the Company and the trustees of the registered pension schemes have agreed that, in addition to payments made in 2009, deficit payments will be made totalling £207 million in 2010, £106 million in 2011 and £57 million per annum from 2012 to 2016. In addition, a charge over the Humber power station has been provided as additional security for the trustees.

Centrica plc Annual Report and Accounts 2009 137

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36. Pensions continued

2009 2008 Analysis of the amount charged to operating profit £m £m Current service cost – continuing operations (i) 68 106 Current service cost – discontinued operations 2 – Past service credit – (3) Loss on curtailment 6 6 Net charge to operating profit 76 109

(i) In addition to current service cost on the Group’s defined benefit pension schemes, the Group also charged £3 million (2008: £2 million) to operating profit in respect of defined contribution pension schemes.

2009 2008 Analysis of the amount credited to notional interest £m £m Expected return on pension scheme assets 209 249 Interest on pension scheme liabilities (185) (190) Net credit to notional interest income 24 59

2009 2008 Analysis of the actuarial (loss)/gain recognised in the Statement of Comprehensive Income £m £m Actual return less expected return on pension scheme assets 344 (1,121) Experience losses arising on the scheme liabilities (104) – Changes in assumptions underlying the present value of the schemes’ liabilities (1,044) 722 Actuarial loss to be recognised in accumulated other comprehensive loss, before adjustment for taxation (804) (399) Cumulative actuarial gains recognised in reserves at 1 January, before adjustment for taxation 324 723 Cumulative actuarial (losses)/gains recognised in reserves at 31 December, before adjustment for taxation (480) 324

2009 2008 2007 2006 2005 Five-year history of surplus/(deficit) £m £m £m £m £m Plan assets 3,533 2,642 3,327 2,988 2,570 Defined benefit obligation (4,098) (2,755) (3,230) (3,284) (3,390) Surplus/(deficit) (565) (113) 97 (296) (820)

Five-year history of experience gains and losses 2009 2008 2007 2006 2005 Difference between the expected and actual return on scheme assets: Amount (£m) 344 (1,121) (38) 95 307 Percentage of scheme assets 9.7% 42.4% 1.1% 3.2% 11.9% Experience gains and losses on scheme liabilities: Amount (£m) (104) – (16) 145 21 Percentage of the present value of scheme liabilities 2.5% – 0.5% 4.4% 0.6% Total actuarial (loss)/gain recognised in the Statement of Comprehensive Income: Amount (£m) (804) (399) 284 475 (126) Percentage of the present value of scheme liabilities 19.6% 14.5% 8.8% 14.5% 3.7%

2009 2008 Movement in the defined benefit obligation during the year £m £m 1 January 2,755 3,230 Current service cost 70 106 Past service credit – (3) Loss on curtailment 6 6 Interest on scheme liabilities 185 190 Plan participants’ contributions 30 26 Benefits paid from schemes (97) (79) Benefits paid by company (1) (1) Actuarial loss/(gain) 1,148 (722) Acquisitions of businesses (note 37) 63 – Disposals of businesses (62) – Exchange adjustments 1 2 31 December 4,098 2,755

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36. Pensions continued Review – Business Report Directors’

2009 2008 Movement in plan assets during the year £m £m 1 January 2,642 3,327 Movements in the year: Expected return on scheme assets 209 249 Actuarial gain/(loss) 344 (1,121) Employer contributions (i) 403 240 Plan participants’ contributions 30 26 Benefits paid from schemes (97) (79) Acquisitions of businesses (note 37) 46 – Disposals of businesses (45) – Exchange gains 1 – 31 December 3,533 2,642 – Governance Report Directors’ (i) Includes £nil (2008: £56 million) related to exceptional charges recorded in prior years.

Estimated future employer contribution rates (pensionable salary and percentage of pensionable salary)

for the year ended 31 December 2010 £m % (i) Centrica Pension Scheme – Final salary section 6 31.4 Centrica Pension Scheme – Career average salary section 105 10.7 Centrica Engineers Pension Scheme – Final salary section 186 19.7 Centrica Engineers Pension Scheme – Career average salary section 67 9.5 Centrica Pension Plan – Management section 71 20.7 Centrica Pension Plan – 2008 section 119 19.5

(i) Contribution rates have been agreed in principle based on the 31 March 2009 triennial actuarial valuation.

Financial Statements 37. Business combinations During the year the Group acquired 100% of the issued share capital of Venture Production plc (Venture) and 50% of the issued share capital of Segebel S.A. (Segebel). Other smaller acquisitions are described in section (c).

The purchase method of accounting was adopted in all cases. The assets and liabilities acquired and their fair values are shown below. The residual excess of cash consideration over the net assets acquired on each acquisition is recognised as goodwill in the Financial Statements. Unless otherwise stated, the fair values disclosed are provisional because the Directors have not yet reached a final determination on all aspects of the fair value exercise. Shareholder Information (a) Venture During the period the Group acquired 100% of the issued share capital of Venture for total consideration of £1,253 million in a series of transactions occurring between 18 March 2009 and 9 November 2009. The Group obtained a controlling interest in Venture on 27 August 2009, at which point 66.39% (i) of the issued share capital had been acquired. Venture was therefore consolidated as a subsidiary of the Group from this date. The acquired business contributed a loss after taxation of £26 million for the period from 27 August 2009 to 31 December 2009.

For business combinations achieved in stages IFRS 3 requires that in determining the amount of goodwill arising, each exchange transaction be treated separately, using the cost of the transaction and fair value information at the date of each of the individual share purchase transactions.

Based on the fair value exercise undertaken it has been determined that the fair values of the assets and liabilities of Venture did not change materially between the dates of the various share purchase transactions. As such, goodwill arising on the acquisition has been calculated by reference to the fair values of the assets and liabilities of Venture at the date control was obtained by the Group (27 August 2009).

(i) A minority interest of £201 million was created at the acquisition date, which was fully purchased by 9 November 2009. The minority interest’s share of profit after taxation between these dates was £nil.

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37. Business combinations continued The book values of the assets and liabilities have been adjusted to align with the fair values of the assets and liabilities acquired. Adjustments have been made principally in respect of the following items:

Item Nature of adjustment

Intangible assets Recognition of exploration and evaluation assets at fair value. Property, plant and equipment Recognition of producing gas and oil field assets at fair value. Interests in joint ventures and associates Write-down of certain investments deemed to be irrecoverable. Trade and other payables: current Recognition at fair value of the current portion of operating lease contracts priced above market rates, as well as the recognition at fair value of certain liabilities in respect of share- based payment awards due to be settled in cash. Trade and other payables: non-current The recognition at fair value of the non-current portion of operating lease contracts priced above market rates. Bank loans and other borrowings: non-current Recognition of certain debt and borrowings at fair value. Deferred tax liabilities Recognition of deferred tax liabilities in respect of fair value adjustments.

Goodwill of £654 million has arisen principally in relation to the recognition of deferred tax on the fair value adjustments. Other factors that have resulted in goodwill include expected cost savings and synergies, forecast improvements in the management of the Group’s existing upstream gas assets and an expectation of enhanced future developments of new oil and gas fields.

IFRS carrying values pre-acquisition Fair value . £m £m Intangible assets – exploration and evaluation assets 27 100 Intangible assets – other – 1 Property, plant and equipment – producing gas and oil field assets 1,097 1,748 Property, plant and equipment – other 3 3 Interests in joint ventures and associates 39 13 Trade and other receivables: non-current 7 – Net derivative financial instruments: non-current 12 12 Available-for-sale financial assets 8 8 Inventories 5 8 Trade and other receivables: current 86 86 Net derivative financial instruments: current 37 37 Cash and cash equivalents 138 138 Trade and other payables: current (125) (188) Provisions for other liabilities and charges: current – (2) Trade and other payables: non-current (10) (19) Bank loans and other borrowings: non-current (427) (484) Deferred tax liabilities (339) (648) Provisions for other liabilities and charges: non-current (214) (214) Net assets acquired 344 599 Goodwill 654 Total consideration 1,253 Consideration comprises: Cash consideration 1,223 Transaction costs 30

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37. Business combinations continued Review – Business Report Directors’

(b) Segebel On 20 January 2009 the Group acquired 50% of the issued share capital of Segebel for total consideration of €591 million (£544 million), including deferred consideration of €70 million (£62 million) and transaction costs of €6 million (£6 million), bringing the Group’s total ownership interest in Segebel to 100%. As explained in note 38, the Group disposed of its total interest in Segebel on 26 November 2009 for cash consideration of €1,325 million (£1,205 million), recognising a gain on disposal of £297 million. The additional interest in Segebel acquired on 20 January 2009 resulted in the Group acquiring a controlling interest in Segebel, and it was therefore consolidated as a subsidiary from the date of acquisition to the date of disposal. Segebel holds a controlling stake of 51% in SPE S.A. (SPE), a Belgian energy company. As such, the acquisition also resulted in the Group obtaining a controlling interest in SPE. The acquired business contributed a profit after taxation of £18 million for the period from 20 January 2009 to 26 November 2009, as included within discontinued operations in the Group Income Statement.

The fair values of the consolidated assets and liabilities of Segebel, including 100% of the assets and liabilities of SPE as at the acquisition date, are disclosed below. In order to calculate goodwill arising from the acquisition, the minority interests in SPE (49%) are eliminated from the consolidated net assets in order to present the net assets attributable to Segebel, of which the Group acquired 50%. Directors’ Report – Governance Report Directors’ The book values of the assets and liabilities have been adjusted to align with the fair values of the assets and liabilities acquired. Adjustments have been made in respect of other intangible assets, primarily to recognise a nuclear power purchase agreement and contractual customer relationships at fair value, to property, plant and equipment in order to recognise power generation assets at their fair value, to trade and other receivables in order to recognise in-the-money ‘own use’ energy procurement contracts at fair value, to trade and other payables in order to recognise out-of-the-money ‘own use’ energy procurement contracts at fair value and to deferred tax in order to recognise amounts arising on the fair value adjustments made.

During the period the Directors reached a final determination on all aspects of the fair value exercise. A number of revisions to the fair values disclosed in the 2008 Annual Report and Accounts were made. The key factors that led to these fair value revisions are described below. In addition to the revisions described below, other smaller revisions reduced the fair value of net assets of SPE by £5 million. The revisions resulted in an overall reduction in the fair value of net assets of SPE at the date of acquisition of £22 million.

Increase/(decrease) in fair value of net assets of SPE Financial Statements at acquisition date Key factors £m Other intangible assets Updated assumptions and estimates within the intangible assets valuation models for customer relationships and a power purchase agreement. (77) Property, plant and equipment Updated assumptions and expectations in respect of key inputs used in the valuation models for power generation assets. (13) Trade and other receivables Updated assumptions and expectations in respect of key inputs used in the valuation models for in-the-money ‘own use’ energy procurement contracts. 8 Shareholder Information Trade and other payables Updated assumptions and expectations in respect of key inputs used in the valuation models for out-of-the-money ‘own use’ energy procurement contracts. 96 Derivative financial instruments Updated assumptions and expectations in respect of key inputs used in the valuation models for acquired energy procurement contracts. (45) Net deferred tax liabilities Changes in the fair value adjustments, resulting in a change in deferred tax liabilities arising as part of the business combination. 14

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37. Business combinations continued Goodwill of £226 million arises principally in relation to incremental benefits expected to arise from the Pax Electrica II arrangements, as well as the recognition of deferred tax on the fair value adjustments.

IFRS carrying values pre-acquisition Fair value £m £m Other intangible assets – power purchase agreement 71 269 Other intangible assets – customer contracts and customer relationships 108 200 Other intangible assets – other 22 30 Property, plant and equipment – power generation assets 296 903 Property, plant and equipment – other 46 24 Trade and other receivables: non-current 43 195 Inventories 25 29 Trade and other receivables: current 435 520 Cash and cash equivalents 134 134 Trade and other payables: current (365) (403) Bank overdrafts, loans and other borrowings: current (14) (16) Net derivative financial instruments: current (65) (75) Trade and other payables: non-current – (44) Bank loans and other borrowings: non-current (88) (88) Net derivative financial instruments: non-current (35) (35) Deferred tax assets/(liabilities) 22 (315) Retirement benefit obligations (17) (17) Provisions for other liabilities and charges: non-current (78) (84) Net assets (100%) 540 1,227 Minority interests in SPE (601) Net assets attributable to Segebel shareholders (51%) 626 Net assets of SPE acquired 313 Other net assets of Segebel acquired (cash and cash equivalents) 5 Total net assets acquired (50%) 318 Goodwill 226 Total consideration 544 Consideration comprises: Transaction costs 6 Deferred consideration (paid during the period) 62 Cash consideration 476

(c) Other acquisitions On 1 June 2009, the Group acquired additional interests in a number of producing oil and gas assets located in Alberta, Canada for cash consideration of C$44 million (£25 million). The provisional fair value of net assets acquired comprised £26 million for property, plant and equipment relating to the producing oil and gas assets, and £1 million in respect of the related decommissioning liability. The Group does not have access to the vendor’s books and records which would include the assets and liabilities of the acquired interest at their pre-acquisition net book values and, hence, it is impracticable to disclose the carrying amounts on this basis. No goodwill was recorded on this acquisition.

The Group also acquired Econergy Ltd on 31 March 2009 (consideration £1 million, goodwill £1 million), Energy and Building Management Solutions Ltd on 29 May 2009 (consideration £3 million, goodwill £3 million) and Newnova Group Ltd on 28 July 2009 (consideration £3 million including contingent consideration of £1 million, goodwill £3 million).

The acquired businesses contributed a profit after taxation of £1 million to the Group from their respective dates of acquisition up to 31 December 2009.

(d) Pro forma results The pro forma consolidated results of the Group, as if the 2009 acquisitions had been made at the beginning of the period, include revenue from continuing operations of £22,308 million (compared to reported Group revenue of £21,963 million), excluding revenue in respect of Segebel which was sold during the period (see note 38), and profit after taxation of £860 million (compared to reported profit of £856 million). In preparing the pro forma results, revenue and costs have been included as if the businesses were acquired on 1 January 2009 and inter-company transactions had been eliminated. This information is not necessarily indicative of the results of the combined Group that would have occurred had the purchases actually been made at the beginning of the period presented, or indicative of the future results of the combined Group.

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38. Disposals, discontinued operations and disposal groups held for sale Review – Business Report Directors’ On 11 May 2009, the Group announced that it had reached a definitive agreement with EDF to dispose of its 100% interest in Segebel S.A. (Segebel) for €1,325 million (£1,205 million). The disposal is linked to the acquisition of the 20% interest in Lake Acquisitions, owner of British Energy (see note 19). The Group acquired its controlling interest in Segebel on 20 January 2009, as described in note 37, and the disposal was completed on 26 November 2009 (see note 38(c)).

In June 2009, in addition to the disposal of Segebel, management approved and initiated a plan to sell Oxxio B.V. (Oxxio) in the Netherlands and Centrica Energía S.L. (Centrica Energía) in Spain. It is anticipated that the sale of Oxxio and Centrica Energía will complete by 30 June 2010.

On 11 December 2009, 50% of the issued share capital of GLID Wind Farms TopCo Limited (GLID), formerly known as Centrica Renewable Holdings Limited, was sold to the Trust Company of the West for £84 million. Centrica has retained 50% of the issued share capital of GLID, which owns 100% of the issued share capital of both Glens of Foudland Limited and Lynn and Inner Dowsing Limited (the owners and operators of the Glens of Foudland and Lynn and Inner Dowsing wind farms respectively). Centrica’s investment in GLID is now being treated as a joint venture due to the joint control that arises from this transaction.

Centrica signed an agreement on 23 December 2009, with Dong Wind (UK) Limited and Siemens Project Ventures GmbH, to sell 50% – Governance Report Directors’ of the issued share capital of Centrica (Lincs) Limited (Lincs), the owner of the proposed Lincs wind farm. The transaction was subject to conditions precedent, and hence the assets and liabilities associated with Lincs have been classified as assets held for sale from this date. Post year end, the conditions precedent were fulfilled, and the transaction completed on 5 February 2010, as explained in note 42.

(a) Discontinued operations As Segebel, Oxxio and Centrica Energía comprise the substantial majority of the European Energy segment, and the Group’s complete downstream operations in those geographical areas, this segment was classified as a discontinued operation from 30 June 2009 (Segebel was classified as a discontinued operation from 11 May 2009). The remainder of the European Energy segment, being the Group’s operations in Germany, remain as part of the Group and are reported within the Industrial and commercial segment. A single amount is shown on the face of the Group Income Statement, comprising the after-tax result of the discontinued operations, and the prior period Income Statement has been restated. An analysis of the results of the European Energy segment presented as discontinued operations in the Group Income Statement is as follows:

2009 2008 Financial Statements

Exceptional Exceptional Business items and certain Results for Business items and certain Results for performance re-measurements the year performance re-measurements the year Year ended 31 December £m £m £m £m £m £m Revenue 2,357 – 2,357 471 – 471 Cost of sales before exceptional items and certain re-measurements (2,008) – (2,008) (475) – (475) Re-measurement of energy contracts – (123) (123) – (80) (80)

Cost of sales (2,008) (123) (2,131) (475) (80) (555) Shareholder Information Gross profit 349 (123) 226 (4) (80) (84) Operating costs before exceptional items (246) – (246) (55) – (55) Exceptional items – (24) (24) – (67) (67) Operating costs (246) (24) (270) (55) (67) (122) Share of profits/(losses) in joint ventures and associates, net of interest and taxation 2 (4) (2) 7 (4) 3 Operating profit/(loss) 105 (151) (46) (52) (151) (203) Net interest expense (12) – (12) – – – Profit/(loss) from operations before taxation 93 (151) (58) (52) (151) (203) Taxation on profit from operations (53) 20 (33) – 21 21 Profit/(loss) after taxation from operations 40 (131) (91) (52) (130) (182) Gain on disposal of Segebel (after taxation) – 297 297 – – – Profit/(loss) after taxation from discontinued operations 40 166 206 (52) (130) (182) Attributable to: Equity holders of the parent (8) 204 196 (52) (130) (182) Minority interests 48 (38) 10 – – – 40 166 206 (52) (130) (182)

Centrica plc Annual Report and Accounts 2009 143

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38. Disposals, discontinued operations and disposal groups held for sale continued (b) Disposal groups classified as held for sale Assets, and associated liabilities, that are expected to be recovered principally through a sale transaction rather than continuing use are classified as held for sale on the face of the Balance Sheet, and presented separately from the assets and liabilities of the Group’s continuing operations. No prior period Balance Sheet restatement is required for disposal groups classified as held for sale.

At 31 December 2009, the sale of Oxxio in the Netherlands, Centrica Energía in Spain, and the partial disposal of Centrica (Lincs) Limited in Upstream UK Power Generation had not completed and hence have been presented as held for sale on the face of the Balance Sheet as follows:

Oxxio and Centrica Energía Other (i) 2009 £m £m £m Goodwill 64 – 64 Other intangible assets 14 – 14 Property, plant and equipment 35 70 105 Deferred tax assets 3 – 3 Derivative financial instruments: non-current 7 – 7 Inventories – 1 1 Trade and other receivables: current 240 1 241 Derivative financial instruments: current 24 – 24 Cash and cash equivalents 19 – 19 Assets of disposal groups classified as held for sale 406 72 478 Trade and other payables: current (264) (1) (265) Derivative financial instruments: current (64) (3) (67) Derivative financial instruments: non-current (18) – (18) Liabilities of disposal groups classified as held for sale (346) (4) (350) Net assets of disposal groups classified as held for sale 60 68 128 Total shareholders’ equity (ii) 60 68 128

(i) Other is comprised predominantly of the assets and liabilities associated with Centrica (Lincs) Limited, the ultimate owner of a prospective wind farm off the Lincolnshire coast and power generation assets in Direct Energy. (ii) The cumulative expense recognised directly in equity includes £10 million in the foreign currency translation reserve, relating to Centrica Energía and Oxxio.

Trade and other receivables include £171 million financial assets and £70 million non-financial assets. £96 million of financial trade and other receivables relate to residential customers, £70 million relate to business customers and £5 million relate to treasury, trading and energy procurement counterparties. Trade and other payables include £185 million financial liabilities and £80 million non-financial liabilities.

The fair value of financial instruments held by disposal groups classified as held for sale are equal to their carrying values.

The derivative financial instruments included in the Balance Sheet predominantly comprise energy derivatives – held for trading under IAS 39 and relate to short-term forward market purchases and sales of electricity. Net losses of £6 million associated with these derivatives were recognised in the Income Statement during 2009.

The derivative financial instruments held by discontinued operations are classified into the following fair value hierarchies (as defined in note 29):

Level 1 Level 2 Level 3 Total £m £m £m £m Financial assets Derivative financial instruments: Energy derivatives – held for trading under IAS 39 3 28 – 31 Total financial assets 3 28 – 31 Financial liabilities Derivative financial instruments: Energy derivatives – held for trading under IAS 39 (14) (68) – (82) Foreign exchange derivatives (3) – – (3) Total financial liabilities (17) (68) – (85)

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38. Disposals, discontinued operations and disposal groups held for sale continued Review – Business Report Directors’

(c) Disposals The disposal of the Group’s 100% interest in Segebel on 26 November 2009 resulted in a profit on disposal, net of taxation, of £297 million. As described in note 37, Segebel holds a controlling stake (51%) in SPE S.A.

The disposal of 50% of the Group’s interest in GLID Wind Farms TopCo Limited on 11 December 2009 resulted in a profit on disposal, net of taxation, of £49 million. The profit on disposal arising from Segebel S.A. and GLID Wind Farms TopCo Limited is as follows:

GLID Wind Farms Segebel S.A. TopCo Limited £m £m Non-current assets (i) 2,118 338 Current assets (ii) 526 59 Current liabilities (254) (59) Non-current liabilities (905) (367) Directors’ Report – Governance Report Directors’ Net assets/(liabilities) 1,485 (29) Minority interests (590) – Net assets/(liabilities) attributable to Centrica disposed 895 (14) Other net assets disposed (loans) – 42 Total net assets disposed 895 28 Cash consideration 1,205 84 Net assets disposed (895) (28) Disposal costs (25) (7) Profit on disposal before taxation 285 49 Taxation on net investment hedges recycled to profit and loss 12 – Profit on disposal after taxation 297 49

(i) Non-current assets of Segebel S.A. disposed of include £261 million of goodwill. Financial Statements (ii) Includes cash and cash equivalents of £327 million in Segebel S.A. and £30 million in GLID Wind Farms TopCo Limited.

39. Commitments and contingencies (a) Commitments 2009 2008 Commitments in relation to the acquisition of property, plant and equipment £m £m Construction of a power station at Langage 43 64 Construction of Lincs wind farm (i) 385 4

Redevelopment of Statfjord gas field 80 62 Shareholder Information Other gas field developments 36 60 Other 19 80 563 270

(i) The Lincs wind farm has been classified as held for sale at the balance sheet date, and was disposed of on 5 February 2010, as described in note 42.

2009 2008 Commitments in relation to the acquisition of intangible assets £m £m Renewable obligation certificates 1,446 1,058 Carbon emissions certificates 326 399 Certified emission reduction certificates 110 139 Exploration activity 205 25 Other 40 58 2,127 1,679

2009 2008 Commitments in relation to other contracts £m £m Liquefied natural gas capacity 675 783 Transportation capacity 689 829 Outsourcing of services 325 216 Other 444 355 2,133 2,183

Centrica plc Annual Report and Accounts 2009 145

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39. Commitments and contingencies continued

2009 2008 (restated) (i) Commitments in relation to commodity purchase contracts £m £m Within one year (ii) 11,254 16,122 Between one and five years (iii) 22,295 24,023 After five years 14,524 11,210 48,073 51,355

(i) Restated to include an additional £920 million and £756 million of commodity commitments ‘within one year’ and ‘between one and five years’ respectively. (ii) Includes £144 million (2008: £249 million) in relation to discontinued operations, as described in note 38. (iii) Includes £112 million (2008: £202 million) in relation to discontinued operations, as described in note 38.

The Group procures gas and electricity through a mixture of production from owned gas fields, power stations, wind farms and procurement contracts. Procurement contracts include short-term forward market purchases of gas and electricity at fixed and floating prices. They also include gas and electricity contracts indexed to market prices and long-term gas contracts with non-gas indexation. The total volume of gas to be taken under certain long-term structured contracts depends on a number of factors, including the actual reserves of gas that are eventually determined to be extractable on an economic basis. The resulting monetary commitment is based on the minimum quantities of gas that the Group is contracted to pay at estimated future prices.

The estimated commitment to make payments under gas procurement contracts differs in scope and in basis from the maturity analysis of energy derivatives disclosed in note 22. Only certain procurement and sales contracts are within the scope of IAS 39 and included in note 22. In addition, the volumes used in calculating principal values are estimated using valuation techniques. Contractual commitments which are subject to fulfillment of conditions precedent are excluded.

2009 2008 Commitments by associates and joint ventures £m £m Share of associates’ commitments 302 – Share of joint ventures’ commitments 2 – 304 –

(b) Decommissioning costs The Group has provided certain guarantees and indemnities to BG Group plc in respect of the decommissioning costs of the Morecambe gas fields. The Company and its wholly owned subsidiary, Hydrocarbon Resources Limited, have agreed to provide security, in respect of such guarantees and indemnities, to BG International Limited, which, as original licence holder for the Morecambe gas fields, will have exposure to decommissioning costs relating to the Morecambe gas fields should liabilities not be fully discharged by the Group. The security is to be provided when the estimated future net revenue stream from the Morecambe gas fields falls below 150% of the estimated cost of such decommissioning. The nature of the security may take a number of different forms and will remain in force until the costs of such decommissioning have been irrevocably discharged and the relevant Department of Business, Innovation and Skills (formerly Department of Business Enterprise and Regulatory Reform) decommissioning notice in respect of the Morecambe gas fields has been revoked.

(c) Operating lease commitments At 31 December, the total of future minimum lease payments under non-cancellable operating leases for each of the following periods were:

2009 2008 £m £m Within one year (i) 109 126 Between one and five years (ii) 214 230 After five years 116 142 439 498

2009 2008 £m £m The total of future minimum sub-lease payments expected to be received under non-cancellable operating sub-leases at 31 December 19 14 Lease and sub-lease payments recognised as an expense in the year were as follows: Minimum lease payments 68 77 Contingent rents – renewables (iii) 113 116 Contingent rents – other 3 3

(i) Includes £2 million (2008: £1 million) in relation to discontinued operations, as described in note 38. (ii) Includes £2 million (2008: £2 million) in relation to discontinued operations, as described in note 38. (iii) The Group has entered into long-term arrangements with renewable providers to purchase physical power, renewable obligation certificates and levy exemption certificates from renewable sources. Payments made under these contracts are contingent upon actual production and therefore the commitment to a minimum lease payment included above is £nil (2008: £nil). Payments made for physical power are charged to the Income Statement as incurred and disclosed as contingent rents.

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39. Commitments and contingencies continued Review – Business Report Directors’

(d) Contingent liabilities There are no material contingent liabilities.

(e) Guarantees and indemnities In connection with the Group’s energy trading, transportation and upstream activities, certain Group companies have entered into contracts under which they may be required to prepay or provide credit support or other collateral in the event of a significant deterioration in creditworthiness. The extent of credit support is contingent upon the balance owing to the third party at the point of deterioration. 40. Related party transactions During the year, the Group entered into the following transactions with related parties who are not members of the Group:

2009 2008

Sale Purchase Sale Purchase of goods of goods Other of goods of goods Other and services and services transactions and services and services transactions – Governance Report Directors’ £m £m £m £m £m £m Joint ventures: Barrow Offshore Wind Limited – 22 1 – 12 1 Braes of Doune Wind Farm (Scotland) Limited – 17 – – 13 – GLID Wind Farms TopCo Limited – 9 – – – – Associates: Lake Acquisitions Limited – 1 – – – – North Sea Infrastructure Partners Limited – 34 – – – – The Consumers’ Waterheater Income Fund (i) – – – 78 – 2 – 83 1 78 25 3

(i) The Consumers’ Waterheater Income Fund is no longer considered to be a related party. Transactions with this entity are on an arm’s length basis.

Financial Statements Balances outstanding with related parties at 31 December were as follows:

2009 2008

Provision for bad Provision for bad or doubtful debt or doubtful debt Amounts owed relating to amounts Amounts owed relating to amounts from related Amounts owed to owed from related from related Amounts owed to owed from related parties related parties parties parties related parties parties £m £m £m £m £m £m Joint ventures: Barrow Offshore Wind Limited 11 5 – 16 4 – Shareholder Information Braes of Doune Wind Farm (Scotland) Limited 21 3 – 32 8 – GLID Wind Farms TopCo Limited 41 26 – – – – Bacton Storage Company Limited 2 – – – – – Associates: North Sea Infrastructure Partners Limited – 3 – – – – The Consumers’ Waterheater Income Fund (i) – – – 5 – – 75 37 – 53 12 –

(i) The Consumers’ Waterheater Income Fund is no longer considered to be a related party. Transactions with this entity are on an arm’s length basis.

2009 2008 Remuneration of key management personnel £m £m Short-term benefits 10 10 Post-employment benefits 1 1 Share-based payments 9 6 20 17

Key management personnel comprise members of the Board and Executive Committee, a total of 13 individuals at 31 December 2009 (2008: 15). Key management personnel and their families purchase gas, electricity and home services products from the Group for domestic purposes on terms equal to those for other employees of the Group.

Centrica plc Annual Report and Accounts 2009 147

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41. Fixed-fee service and insurance contracts Fixed-fee service contracts are entered into with home services customers in the UK and home and business services customers in North America. These contracts continue until cancelled by either party to the contract. These plans incorporate both an annual service element and a maintenance element.

Insurance contracts are entered into with home service customers in the UK by British Gas Insurance Limited, an entity regulated by the Financial Services Authority (‘FSA’) since August 2009. Product offerings include central heating, boiler and controls, plumbing and drains and electrical appliance insurance cover. These contracts are normally for periods of 12 months with the option of renewal.

Fixed-fee service and insurance contracts protect purchasers of these contracts against the risk of breakdown of electrical, plumbing, heating, cooling and household appliances, resulting in the transfer of an element of risk from contract holders to Centrica. Benefits provided to customers vary in accordance with terms and conditions of the contracts entered into, however, generally include repair and/or replacement of the items affected.

The risk and level of service required within these contracts is dependent upon the occurrence of uncertain future events, in particular the number of call-outs, the cost per call-out and the nature of the fault. Accordingly, the timing and amount of future cash outflows related to the contracts is uncertain.

The key terms and conditions that affect future cash flows are as follows: • provision of labour and parts for repairs, dependent on the agreement and associated level of service; • one safety and maintenance inspection either annually or in every continuous two-year period, as set out in the agreement; • no limit to the number of call-outs to carry out repair work; and • caps on certain maintenance and repair costs within fixed-fee service and insurance contracts. Revenue from fixed-fee service and insurance contracts is recognised with regard to the incidence of risk over the life of the contract, reflecting the seasonal propensity of claims to be made under the contracts and the benefits receivable by the customer, which span the life of the contract as a result of emergency maintenance being available throughout the contract term. Cost of sales relates directly to the engineer workforce employed by Centrica within home services, the cost of which is accounted for over a 12-month period with adjustments made to reflect the seasonality of workload over a given year. The costs of claims under the fixed-fee service and insurance contracts will be the costs of the engineer workforce employed by Centrica within home services. These costs are accounted for over a 12-month period with adjustments made to reflect the seasonality of workload over a given year. Weather conditions and the seasonality of maintenance can affect the number of call-outs, the cost per call-out and the nature of the fault. Centrica’s obligations under the terms of home services fixed-fee service and insurance contracts are based on the number of breakdowns occurring within the contract period.

Centrica actively manages the risk exposure of these uncertain events by undertaking the following risk mitigation activities: • an initial service visit is performed for central heating care and insurance cover. If, at the initial visit, faults that cannot be rectified are identified, the fixed-fee service and insurance contract will be cancelled and no further cover provided; • an annual or biennial safety and maintenance inspection is performed to ensure all issues are identified prior to them developing into significant maintenance or breakdown issues; and • caps on certain maintenance and repair work are incorporated into fixed-fee service and insurance contracts to limit liability in areas considered to be higher risk in terms of prevalence and cost to repair. The Group considers the adequacy of estimated future cash flows under the contracts to meet expected future costs under the contracts. Any deficiency is charged immediately to the Income Statement. Service requests are sensitive to the reliability of appliances as well as the impact of weather conditions. Each incremental 1% increase in service requests would impact profit and equity by approximately £8 million (2008: £8 million). The contracts are not exposed to any interest rate risk or significant credit risk and do not contain any embedded derivatives.

The fixed-fee service claims and insurance claims notified during the year were £305 million (2008: £291 million) and £2 million (2008: £nil) respectively and were exactly matched by expenses related to fixed-fee service and insurance contracts. All claims are settled immediately and in full. Due to the short lead time between claims being incurred and claims being rectified, there are no material provisions outstanding at the balance sheet date (2008: £nil). 2009 2008 (restated) (i) £m £m Total revenue 995 942 Expenses relating to fixed-fee service and insurance contracts 803 754 Deferred income (unearned premium) 55 58 Accrued income 21 3

(i) Restated to reflect the change in British Gas Services Limited’s revenue recognition policy, as explained in note 2.

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42. Events after the balance sheet date Review – Business Report Directors’ The Directors propose a final dividend of 9.14 pence per ordinary share (totalling £470 million) for the year ended 31 December 2009. The dividend will be submitted for formal approval at the Annual General Meeting to be held on 10 May 2010 and, subject to approval, will be paid on 16 June 2010 to those shareholders registered on 30 April 2010.

On 5 February 2010, 50% of the issued share capital of Centrica (Lincs) Limited (Lincs) was sold to Dong Wind (UK) Limited and Siemens Project Ventures GmbH for £50 million. Centrica has retained 50% of the issued share capital of Lincs and Centrica’s investment in Lincs is accounted for as a joint venture from this date due to the joint control that arises from this transaction.

On 12 February 2010, the Group redeemed £250 million of debt with a maturity date of 12 December 2011.

On 25 February 2010, the Group announced that it had agreed to acquire a portfolio of Trinidad and Tobago gas assets from Suncor Energy Inc. for approximately US$380 million (£246 million) in cash, subject to certain conditions being satisfied. Directors’ Report – Governance Report Directors’ Financial Statements Shareholder Information

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43. Principal undertakings

Country of Percentage holding in ordinary 31 December 2009 incorporation/formation shares and net assets Principal activity Subsidiary undertakings (i) Accord Energy Limited England 100 Proprietary energy trading Accord Energy (Trading) Limited England 100 Proprietary energy trading Bastrop Energy Partners LP USA 100 Power generation Brae Canada Ltd Canada 100 Investment company British Gas Insurance Limited England 100 Insurance services British Gas Services Limited England 100 Energy services British Gas Trading Limited England 100 Energy supply Caythorpe Gas Storage Limited England 100 Gas storage Centrica Barry Limited England 100 Power generation Centrica Brigg Limited England 100 Power generation Centrica Canada Limited Canada 100 Holding company and gas production Centrica Energy Operations Limited England 100 Power generation Centrica KL Limited England 100 Power generation Centrica KPS Limited England 100 Power generation Centrica Langage Limited England 100 Power generation Centrica PB Limited England 100 Power generation Centrica Renewable Energy Limited England 100 Renewable energy holding company Centrica Resources Limited England 100 Gas and oil production Centrica Resources (Nigeria) Limited Nigeria 100 Upstream exploration Centrica Resources (Norge) AS Norway 100 Upstream exploration Centrica RPS Limited England 100 Power generation Centrica SHB Limited England 100 Power generation Centrica Storage Limited England 100 Gas storage CPL Retail Energy LP USA 100 Energy supply DER Partnership 2 Canada 100 Gas production Direct Energy LP USA 100 Energy supply Direct Energy Bates LLC USA 100 Asset holding company Direct Energy Business LLC USA 100 Energy supply Direct Energy Marketing Inc USA 100 Wholesale energy trading Direct Energy Marketing Limited Canada 100 Energy supply and home services Direct Energy Partnership Canada 100 Energy supply Direct Energy Resources Partnership Canada 100 Gas production Direct Energy Services LLC USA 100 Energy supply and home services Direct Energy US Home Services Inc (ii) USA 100 Holding company Dyno Holdings Limited England 100 Home services Energy America LLC USA 100 Energy supply Frontera Generation LP USA 100 Power generation GB Gas Holdings Limited England 100 Holding company Hydrocarbon Resources Limited England 100 Gas production NSGP (Ensign) Limited (iii) Jersey 100 Oil and natural gas development Paris Generation LP USA 100 Power generation The Centrica Gas Production LP England 100 Gas production Venture North Sea Gas Limited (iii) Scotland 100 Gas and oil production Venture North Sea Gas Exploration Limited (iii) England 100 Gas and oil production Venture North Sea Oil Limited (iii) Scotland 100 Gas and oil production Venture Production plc (iii) Scotland 100 Holding company WTU Retail Energy LP USA 100 Energy supply Joint ventures and associates (i) Barrow Offshore Wind Limited England 50 Power generation Braes of Doune Wind Farm (Scotland) Limited Scotland 50 Power generation GLID Wind Farms TopCo Limited (iv) England 50 Renewable energy holding company Lake Acquisitions Limited (iii) England 20 Power generation NNB Holding Company Limited (iii) England 20 Power generation

(i) All principal undertakings are held indirectly by the Company. The information is only given for those subsidiaries which in the Directors’ opinion principally affect the figures shown in the Financial Statements. (ii) Previously called Residential Services Group Inc. (iii) Interest acquired in 2009. (iv) Previously called Centrica Renewable Holdings Limited, as explained in note 38.

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We have audited the parent Company Financial Statements of Centrica plc for the year ended 31 December 2009 which comprise the Directors’ Report – Business Review – Business Report Directors’ Company Balance Sheet and the related notes. The financial reporting framework that has been applied in their preparation is applicable law and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice).

Respective responsibilities of directors and auditors As explained more fully in the Directors’ Responsibilities Statement set out on page 43, the Directors are responsible for the preparation of the parent Company Financial Statements and for being satisfied that they give a true and fair view. Our responsibility is to audit the parent Company Financial Statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors.

This report, including the opinions, has been prepared for and only for the Company’s members as a body in accordance with Chapter 3 of Part 16 of the Companies Act 2006 and for no other purpose. We do not, in giving these opinions, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing.

Scope of the audit of the Financial Statements An audit involves obtaining evidence about the amounts and disclosures in the Financial Statements sufficient to give reasonable assurance that the Financial Statements are free from material misstatement, whether caused by fraud or error. This includes an – Governance Report Directors’ assessment of: whether the accounting policies are appropriate to the parent Company’s circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the Directors; and the overall presentation of the Financial Statements.

Opinion on Financial Statements In our opinion the parent Company Financial Statements: • give a true and fair view of the state of the Company’s affairs as at 31 December 2009; • have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice; and • have been prepared in accordance with the requirements of the Companies Act 2006. Opinion on other matters prescribed by the Companies Act 2006 In our opinion: Financial Statements • the part of the Directors’ Remuneration Report to be audited has been properly prepared in accordance with the Companies Act 2006; and • the information given in the Directors’ Report for the financial year for which the parent Company Financial Statements are prepared is consistent with the parent Company Financial Statements.

Matters on which we are required to report by exception We have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to you if, in our opinion:

• adequate accounting records have not been kept by the parent Company, or returns adequate for our audit have not been received Shareholder Information from branches not visited by us; or • the parent Company Financial Statements and the part of the Directors’ Remuneration Report to be audited are not in agreement with the accounting records and returns; or • certain disclosures of directors’ remuneration specified by law are not made; or • we have not received all the information and explanations we require for our audit.

Other matter We have reported separately on the Group Financial Statements of Centrica plc for the year ended 31 December 2009.

John Maitland (Senior Statutory Auditor) for and on behalf of PricewaterhouseCoopers LLP Chartered Accountants and Statutory Auditors London 25 February 2010

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Company Balance Sheet

2009 2008 (restated) (i) 31 December Notes £m £m Fixed assets Tangible fixed assets III 39 35 Investments in subsidiary undertakings IV 2,122 2,091 2,161 2,126 Current assets Debtors V 9,882 8,162 Current asset investments VI 1,259 2,842 Cash at bank and in hand 10 – 11,151 11,004 Creditors (amounts falling due within one year) Borrowings VII (53) (297) Other creditors VIII (4,910) (4,945) (4,963) (5,242) Net current assets 6,188 5,762 Total assets less current liabilities 8,349 7,888 Creditors (amounts falling due after more than one year) Borrowings VII (3,982) (2,835) Other creditors VIII (69) (29) (4,051) (2,864) Provisions for liabilities and charges IX (8) (17) Net assets 4,290 5,007 Capital and reserves – equity interests Called up share capital X 317 315 Share premium account X 778 729 Capital redemption reserve X 16 16 Other reserves X 3,179 3,947 Shareholders’ funds XI 4,290 5,007

(i) Restated to classify the non-current portion of those derivative financial instruments held for the purpose of treasury management from debtors and creditors due within one year to debtors and creditors due after one year.

The Financial Statements on pages 152 to 158 were approved and authorised for issue by the Board of Directors on 25 February 2010 and were signed on its behalf by:

Sam Laidlaw Nick Luff Chief Executive Group Finance Director The notes on pages 153 to 158 form part of these Financial Statements, along with notes 30 and 35 to the Group Financial Statements.

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I. Principal accounting policies of the Company Review – Business Report Directors’ Accounting principles The Company Balance Sheet has been prepared in accordance with applicable UK accounting standards and under the historical cost convention and the Companies Act 2006.

Basis of preparation No profit and loss account is presented for the Company as permitted by section 408(3) of the Companies Act 2006. The Company loss after tax for the year ended 31 December 2009 was £132 million (2008: £93 million loss).

Presentation of derivative financial instruments In line with the Group’s accounting policy for derivative financial instruments, the Company has classified those derivatives held for the purpose of treasury management as current or non-current, based on expected settlement dates. Previously these balances were classified as current, irrespective of settlement date.

This change in presentation has resulted in recognition of derivative financial assets due after more than one year of £125 million, current derivative financial assets of £6 million, current derivative financial liabilities of £16 million and derivative financial liabilities due after more

than one year of £60 million. The impact on comparatives has been to report an increase in derivative financial assets due after more – Governance Report Directors’ than one year of £12 million, a decrease in current derivative financial assets of £12 million, a decrease in current derivative financial liabilities of £25 million and an increase in derivative financial liabilities due after more than one year of £25 million.

Employee share schemes The Group has a number of employee share schemes, detailed in note 35, under which it makes equity-settled share-based payments to certain employees. Equity-settled share-based payments are measured at fair value at the date of grant (excluding the effect of non- market-based vesting conditions). The fair value determined at the grant date is expensed on a straight-line basis together with a corresponding increase in equity over the vesting period, based on the Group’s estimate of the number of awards that will vest and adjusted for the effect of non-market-based vesting conditions. The issue of share incentives by the Company to employees of its subsidiaries represents additional capital contributions. An addition to the Company’s investment in subsidiary undertakings is reported with a corresponding increase in shareholders’ funds. The addition to the Company’s investment in subsidiary undertakings is reduced on the issue of share incentives as these are recharged to the subsidiaries.

Fair value is measured using methods appropriate to each of the different schemes as follows: Financial Statements

LTIS: awards up to 2005 A Black-Scholes valuation augmented by a Monte Carlo simulation to predict the total shareholder return performance LTIS: EPS awards after 2005 Market value on the date of grant LTIS: TSR awards after 2005 A Monte Carlo simulation to predict the total shareholder return performance Sharesave Black-Scholes ESOS Black-Scholes using an adjusted option life assumption to reflect the possibility of early exercise Shareholder Information SAS, SIP, DMSS, RSS, ESPP and DBP Market value on the date of grant

Foreign currencies Transactions in foreign currencies are translated at the rate of exchange ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated into pounds sterling at closing rates of exchange. Exchange differences on monetary assets and liabilities are taken to the Profit and Loss Account.

Tangible fixed assets Tangible fixed assets are included in the Balance Sheet at cost, less accumulated depreciation and any provisions for impairment. Tangible fixed assets are depreciated on a straight-line basis at rates sufficient to write off the cost, less estimated residual values, of individual assets over their estimated useful lives of up to ten years.

Leases Rentals under operating leases are charged to the Profit and Loss Account on a straight-line basis.

Investments Fixed asset investments are held in the Balance Sheet at cost, less any provision for impairment as necessary. Current asset investments are stated at the lower of cost and net realisable value.

Pensions and other post-retirement benefits The Company’s employees participate in a number of the Group’s defined benefit pension schemes as described in note 36 to the Group Financial Statements. The Company is unable to identify its share of the underlying assets and liabilities in the schemes on a consistent and reasonable basis and therefore accounts for the schemes as if they were defined contribution schemes. The charge to the Profit and Loss Account is equal to the contributions payable to the schemes in the accounting period. Details of the defined benefit schemes of the Group (accounted for in accordance with the Group’s accounting policies detailed in note 2 to the Group Financial Statements) can be found in note 36 to the Group Financial Statements.

Centrica plc Annual Report and Accounts 2009 153

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I. Principal accounting policies of the Company continued Taxation Current tax, including UK corporation tax, is provided at amounts expected to be paid (or recovered) using the tax rates and laws that have been enacted or substantively enacted by the balance sheet date.

Deferred tax is recognised in respect of all timing differences that have originated, but not reversed, at the balance sheet date where transactions or events that result in an obligation to pay more tax in the future, or a right to pay less tax in the future, have occurred at the balance sheet date. Timing differences are differences between the Group’s taxable profits and its results as stated in the Financial Statements that arise from the inclusion of gains and losses in tax assessments in periods different from those in which they are recognised in the Financial Statements. A deferred tax asset is regarded as recoverable and therefore recognised only when, on the basis of all available evidence, it can be regarded as more likely than not that there will be suitable taxable profits in the foreseeable future from which the reversal of the underlying timing differences can be deducted.

Deferred tax is not recognised when fixed assets are revalued unless, by the balance sheet date, there is a binding agreement to sell the revalued assets and the gain or loss expected to arise on sale has been recognised in the Financial Statements. Deferred tax is not recognised when fixed assets are sold and it is more likely than not that the taxable gain will be rolled over, being charged to tax only if and when the replacement assets are sold. Deferred tax is recognised in respect of the retained earnings of overseas subsidiaries and associates only to the extent that, at the balance sheet date, dividends have been accrued as receivable or a binding agreement to distribute past earnings in the future has been entered into by the subsidiary or associate.

Deferred tax is measured at the average tax rates that are expected to apply in the periods in which the timing differences are expected to reverse, based on tax rates and laws that have been enacted or substantively enacted by the balance sheet date.

Deferred tax is measured on a non-discounted basis.

Financial instruments and borrowings The Company’s accounting policies for financial instruments and borrowings are consistent with those of the Group, and are disclosed in note 2 to the Group Financial Statements. The Company’s financial risk management policies are consistent with those of the Group and are described in the Directors’ Report – Governance on pages 42 and 43, and in note 4 to the Group Financial Statements.

The Company is exempted by FRS 29, Financial Instruments: Disclosures, from providing detailed disclosures in respect of its financial instruments because the Company is included within the Group’s consolidated accounts and its financial instruments are incorporated into the disclosures in the notes to the Group Financial Statements. II. Directors and employees Included within the Company’s Profit and Loss Account for the year are wages and salaries costs of £46 million (2008: £42 million), social security costs of £4 million (2008: £4 million), share scheme costs of £7 million (2008: £8 million) and other pension and retirement benefit costs of £45 million (2008: £27 million).

Details of Directors’ remuneration, share-based payments and pension entitlements in the Remuneration Report on pages 45 to 59 form part of these Financial Statements. Details of employee share-based payments are given in note 35. Details of the remuneration of key management personnel are given in note 40.

The average number of employees of the Company during the year was 594 (2008: 631), who were employed primarily in the UK.

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III. Tangible fixed assets Review – Business Report Directors’

2009 2008

Plant, equipment Plant, equipment and vehicles and vehicles £m £m Cost 1 January 84 79 Additions 19 5 Disposals (2) – 31 December 101 84 Depreciation and amortisation 1 January 49 36 Charge for the year 13 13 31 December 62 49

Net book value – Governance Report Directors’ 31 December 39 35

IV. Investments in subsidiary undertakings

2009 2008

Investments in Investments in subsidiaries’ subsidiaries’ shares shares £m £m Cost 1 January 2,091 2,080 Additions and disposals (i) 31 11 31 December 2,122 2,091

Financial Statements (i) Additions and disposals represent the net change in shares to be issued under employee share schemes in Group undertakings.

V. Debtors

2009 2008 (restated) (i)

Due within Due after more Due within Due after more one year than one year Total one year than one year Total £m £m £m £m £m £m Amounts owed by Group undertakings 9,729 – 9,729 7,933 – 7,933 (ii)

Derivative financial instruments 6 125 131 48 150 198 Shareholder Information Other debtors 14 – 14 18 – 18 Prepayments and other accrued income 8 – 8 13 – 13 9,757 125 9,882 8,012 150 8,162

(i) Restated to classify the non-current portion of derivative financial instruments from debtors due within one year to debtors due after more than one year, as explained in note I. (ii) Derivative financial instruments comprise foreign currency derivatives held for trading of £37 million (2008: £40 million), interest rate derivatives held for trading of £3 million (2008: £2 million), interest rate derivatives held for hedging of £70 million (2008: £62 million) and foreign currency derivatives held for hedging of £21 million (2008: £94 million). The fair value of these derivatives is equivalent to the carrying value.

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VI. Current asset investments

2009 2008 £m £m Short-term investments 1,259 2,842

£48 million (2008: £26 million) of investments were held by the Law Debenture Trust, on behalf of the Company, as security in respect of the Centrica Unapproved Pension Scheme (refer to note 36 to the Group Financial Statements). VII. Borrowings

2009 2008

Within one year After one year Within one year After one year Amounts falling due £m £m £m £m Bank loans and overdrafts 53 374 40 422 Bonds – 3,608 253 2,413 Commercial paper – – 4 – 53 3,982 297 2,835 The Company’s financial instruments and related disclosures are included within the consolidated accounts of the Group. As permitted by FRS 29, Financial Instruments: Disclosures, further detailed disclosure in respect of the Company is not included. Disclosures in respect of the Group’s borrowings are provided in note 26 to the Group Financial Statements. VIII. Other creditors

2009 2008 (restated) (i)

Due after more Due after more Due within one year than one year Due within one year than one year £m £m £m £m Trade creditors 17 – 17 – Amounts owed to Group undertakings 4,839 4 4,597 – Derivative financial instruments (ii) 16 60 284 29 Taxation and social security 1 – 1 – Accruals and deferred income 37 5 46 – 4,910 69 4,945 29

(i) Restated to classify the non-current portion of derivative financial instruments from creditors due within one year to creditors due after more than one year, as explained in note I. (ii) Derivative financial instruments comprise foreign currency derivatives held for trading of £61 million (2008: £213 million), interest rate derivatives held for trading of £5 million (2008: £19 million), interest rate derivatives held for hedging of £10 million (2008: £4 million) and foreign currency derivatives held for hedging of £nil (2008: £77 million). The fair value of these derivatives is equivalent to the carrying value.

IX. Provisions for liabilities and charges

1 January 2009 Profit and loss charge Utilised in the year Reserves movements 31 December 2009 £m £m £m £m £m Other provisions 10 – (2) – 8 Deferred tax 7 (1) – (6) – 17 (1) (2) (6) 8

Potential unrecognised deferred corporation tax assets amounted to £9 million (2008: £6 million), primarily relating to unused tax losses. The Company does not expect to be able to utilise these losses within the foreseeable future.

Other provisions principally represent estimated liabilities for contractual settlements and National Insurance in respect of employee share scheme liabilities. The National Insurance provision was based on a share price of 281.10 pence at 31 December 2009 (2008: 266.00 pence). The majority of the amounts are expected to be utilised between 2010 and 2015.

156

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X. Reserves Review – Business Report Directors’

Capital Cash flow Profit Share Share redemption hedging and loss capital premium reserve reserve reserve Total £m £m £m £m £m £m 1 January 2009 315 729 16 14 3,933 5,007 Loss for the year (i) – – – – (132) (132) Losses on revaluation of cash flow hedges – – – (18) – (18) Deferred tax on revaluation gains – – – 6 – 6 Dividends – – – – (635) (635) Employee share schemes: Increase in treasury shares – – – – (7) (7) Value of services provided – – – – 38 38 Exercise of awards – – – – (24) (24) Gains on revaluation of available-for-sale securities – – – – 4 4 Share issue 2 49 – – – 51 – Governance Report Directors’ 31 December 2009 317 778 16 2 3,177 4,290

(i) As permitted by section 408(3) of the Companies Act 2006, no profit and loss account is presented. The Company’s loss for the year was £132 million (2008: loss of £93 million) before dividends paid of £635 million (2008: £500 million). The profit and loss reserve can be analysed further as follows:

Share-based Profit Treasury payments and loss shares reserve Other reserve £m £m £m £m 1 January 2009 (10) 66 3,877 3,933 Loss for the year (i) – – (132) (132) Dividends – – (635) (635)

Employee share schemes: Financial Statements Increase in treasury shares (7) – – (7) Value of services provided – 38 – 38 Exercise of awards 2 (30) 4 (24) Gains on revaluation of available-for-sale securities – – 4 4 31 December 2009 (15) 74 3,118 3,177

(i) Includes a £2 million profit on re-measurement of interest rate derivatives and bonds designated as the hedged item (2008: £1 million loss) and a £137 million profit on re-measurement of foreign currency derivatives (2008: £138 million loss). Further details of the Company’s interest rate and foreign currency derivatives are included within the financial instrument disclosures in notes 4, 22 and 23 to the Group Financial Statements. Shareholder Information

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XI. Movements in shareholders’ funds

2009 2008 £m £m 1 January 5,007 3,373 Loss attributable to the Company (132) (93) (Loss)/gain on revaluation of cash flow hedges (18) 17 Deferred tax on revaluation gains 6 (7) Dividends paid to shareholders (635) (500) Employee share schemes: Increase in treasury shares (7) (9) Value of services provided 38 40 Exercise of awards (24) (24) Gains on revaluation of available-for-sale securities 4 – Rights Issue – 2,164 Share issue 51 46 Net movement in shareholders’ funds for the financial year (717) 1,634 31 December 4,290 5,007

The Directors propose a final dividend of 9.14 pence per share (totalling £470 million) for the year ended 31 December 2009. The dividend will be submitted for formal approval at the Annual General Meeting to be held on 10 May 2010. These Financial Statements do not reflect this dividend payable, which will be accounted for in shareholders’ equity as an appropriation of retained earnings in the year ending 31 December 2010.

Details of the Company’s share capital are provided in the Group Statement of Changes in Equity and note 30 to the Group Financial Statements. XII. Commitments and indemnities (a) Other commitments At 31 December 2009, the Company had commitments of £151 million (2008: £169 million) relating to contracts with outsource service providers.

(b) Lease commitments At 31 December 2009, lease commitments over land and buildings included non-cancellable operating lease payments due within one to five years of £1 million (2008: £1 million) and guaranteed operating commitments of a subsidiary undertaking of £7 million (2008: £7 million). The Company had no vehicle lease commitments at year end (2008: £1 million).

(c) Guarantees and indemnities Refer to note 39(e) to the Group Financial Statements for details of guarantees and indemnities. The maximum credit risk exposure was represented by the carrying amount for all financial instruments with the exception of financial guarantees issued by the Company to third parties, principally to support its subsidiaries’ gas and power procurement and banking activities. At 31 December 2009, the credit risk exposure under financial guarantees issued by Centrica plc was £3,755 million (2008: £2,558 million).

158

CE7088_CentricaAR_p062-160_Financial.indd 158 8/3/10 11:38:42 Gas and Liquids Reserves (unaudited)

The Group’s estimates of reserves of gas and liquids are reviewed as part of the half-year and full-year reporting process and updated Directors’ Report – Business Review – Business Report Directors’ accordingly. A number of factors affect the volumes of gas and liquids reserves, including the available reservoir data, commodity prices and future costs. Due to the inherent uncertainties and the limited nature of reservoir data, estimates of reserves are subject to change as additional information becomes available.

The Group discloses proven and probable gas and liquids reserves, representing the central estimate of future hydrocarbon recovery. Reserves for Centrica-operated fields are estimated by in-house technical teams composed of geoscientists and reservoir engineers. Reserves for non-operated fields are estimated by the operator, but are subject to internal review and challenge. Internal guidelines for reserve recognition have been revised following the acquisition of Venture Production plc in 2009.

As part of the internal control process related to reserves estimation, an audit of the reserves, including the application of the reserves definitions, is undertaken by an independent technical auditor. Reserves are estimated in accordance with a formal policy and procedure standard.

The Group has estimated proven and probable gas and liquids reserves in Europe and North America.

The principal fields in Europe are South and North Morecambe, Chiswick, Cygnus, Statfjord, Ensign, Grove and Seven Seas fields

associated with UK Upstream, and the Rough and York fields associated with UK Storage. The European reserves estimates are – Governance Report Directors’ consistent with the guidelines and definitions of the Society of Petroleum Engineers, Society of Petroleum Evaluation Engineers and World Petroleum Congress Petroleum Resources Management System using accepted principles. An annual reserves audit has been carried out by DeGoyler and MacNaughton.

The principal fields in North America are Medicine Hat, Entice and Bashaw, located in the province of Alberta, Canada. The North American reserves estimates have been evaluated in accordance with the Canadian Oil and Gas Evaluation Handbook (COGEH) reserves definitions and are consistent with the guidelines and definitions of the Society of Petroleum Engineers and the World Petroleum Congress. An annual reserves audit has been carried out by Sproule Associates Limited.

North Estimated net proven and probable reserves of gas (billion cubic feet) Europe America Rest of World Total 1 January 2009 1,352 375 – 1,727 Revisions of previous estimates (i) 39 (16) – 23 (ii) Purchases of reserves in place 776 55 – 831 Financial Statements Extensions, discoveries and other additions (iii) 18 – – 18 Production (167) (37) – (204) 31 December 2009 2,018 377 – 2,395

North Estimated net proven and probable reserves of liquids (million barrels) Europe America Rest of World Total 1 January 2009 32 4 – 36 Revisions of previous estimates (i) 3 – – 3 Purchases of reserves in place (ii) 32 1 5 38 Shareholder Information Production (9) – – (9) 31 December 2009 58 5 5 68

(i) Includes minor reserves revisions to a number of fields in Europe and North America. (ii) Reflects the acquisition of Venture Production plc in the UK/Rest of World and the Channel Lake, Medallion and Bittern Lake properties in North America. (iii) Recognition of reserves associated with the York field. Liquids reserves include oil, condensate and natural gas liquids.

Centrica plc Annual Report and Accounts 2009 159

CE7088_CentricaAR_p062-160_Financial.indd 159 8/3/10 11:38:42 Five Year Record

Results

2005 (restated) 2006 (restated) 2007 (restated) 2008 (restated) (i), (iii), (iv) (i), (iii), (iv) (i), (iii), (iv) (i), (ii), (iii), (iv) 2009 Year ended 31 December £m £m £m £m £m Group revenue from continuing operations (i), (iii), (iv) 13,274 16,065 15,893 20,872 21,963 Operating profit from continuing operations before exceptional items and certain re-measurements (iv): Downstream UK 278 284 840 712 1,011 Upstream UK 863 686 663 881 525 Storage UK 154 228 240 195 168 North America 147 173 187 215 153 Adjusted operating profit – operating profit before exceptional items, certain re-measurements and impact from fair value uplifts from Strategic Investments 1,442 1,371 1,930 2,003 1,857 Share of joint ventures’ and associates’ interest and taxation (iv) 40 (1) (2) (3) (11) Other 7 13 1 (8) (5) Depreciation of fair value uplifts to property, plant and equipment – – – – (27) 1,489 1,383 1,929 1,992 1,814 Operating profit/(loss) from discontinued operations: European operations (v) (14) 9 20 (52) 105 The Consumers’ Waterheater Income Fund (vi) 38 50 39 – – OneTel (vii) 12 (11) – – – Exceptional items and certain re-measurements after taxation 340 (862) 383 (1,048) (288) Profit/(loss) attributable to equity holders of the parent 1,012 (155) 1,505 (137) 844

Pence Pence Pence Pence Pence Earnings/(loss) per ordinary share (ii), (iii), (ix) 24.4 (3.8) 36.5 (3.3) 16.5 Adjusted basic earnings per ordinary share (ii), (iii), (viii), (ix) 16.2 17.3 27.2 21.7 21.7

Assets and liabilities 2005 (restated) 2006 (restated) 2007 (restated) 2008 (restated) (iii) (iii) (iii) (x) (ii), (iii), (x) 2009 At 31 December £m £m £m £m £m Goodwill and other intangible assets 1,739 1,501 1,539 2,181 2,822 Other non-current assets 4,490 4,171 4,942 6,341 9,650 Net current assets/(liabilities) 644 (134) 747 2,163 330 Non-current liabilities (4,453) (3,918) (3,868) (6,313) (8,675) Net assets of disposal groups held for sale – – – – 128 Net assets 2,420 1,620 3,360 4,372 4,255 Debt, net of cash, cash equivalents and securities: Net debt (excluding non-recourse debt) (1,060) (1,527) (795) (511) (3,136) The Consumers’ Waterheater Income Fund (non-recourse) debt (532) (483) – – – (1,592) (2,010) (795) (511) (3,136)

Cash flows

2005 2006 2007 2008 2009 Year ended 31 December £m £m £m £m £m Cash flow from operating activities before exceptional payments 1,192 850 2,447 371 2,850 Payments relating to exceptional charges (48) (113) (90) (74) (203) Net cash flow from investing activities (529) (720) (964) (1,122) (4,520) Cash flow before cash flow from financing activities 615 17 1,393 (825) (1,873)

(i) Group revenue and cost of sales have been restated to report gas sales revenue of Centrica Storage net of cost of sales to better reflect the nature of the transactions, as explained in note 2. (ii) Restated to capitalise borrowing costs on the adoption of IAS 23 (Amendment), as explained in note 2. (iii) Restated to reflect the change in British Gas Services Limited’s revenue recognition policy, as explained in note 2. (iv) Restated to present the European Energy segment, with the exception of the Group’s operations in Germany, as a discontinued operation, as explained in note 38. The operating profit of the Group’s operations in Germany is reported within the Upstream UK – Industrial and commercial segment. Also restated to present the operating profit of British Gas New Energy within Downstream UK – Residential energy supply and to include the operating profit of joint ventures and associates pre-interest and tax. (v) Discontinued in 2009. (vi) Discontinued in 2007. (vii) Discontinued in 2005. (viii) Adjusted earnings per ordinary share excludes depreciation of fair value uplifts to property, plant and equipment from Strategic Investments after taxation and certain re-measurements and exceptional items. (ix) Figures for 2005 through to 2007 have been adjusted to reflect the bonus element of the Rights Issue. Details of the Rights Issue are provided in notes 30 and 32. (x) Restated to classify the non-current portions of derivative financial instruments from current assets and liabilities to non-current assets and liabilities, as explained in note 2. 2005 and 2006 have not been restated on this basis as it is considered impracticable to do so.

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Centrica plc Annual Report and Accounts 2009 161 Shareholder Information

Electronic communications and the Centrica website The primary means of At the 2007 Annual General Meeting the Company passed a communication: Go online for resolution allowing the Centrica website to be used as the primary means of communication with its shareholders. Those shareholders more information and analysis who have positively elected for website communication (or who were deemed to have consented to electronic communication of your business. in accordance with the Companies Act 2006) will receive written notification whenever shareholder documents are available to view on the Centrica website. The electronic arrangements provide shareholders with the opportunity to access information in a timely manner and help Centrica to reduce both its costs and its impact on the environment. The 2009 Annual Report, Annual Review and Notice of 2010 Annual General Meeting are available to view at www.centrica.com/ report2009. The Centrica website at www.centrica.com also provides news and details of the Company’s activities with links to its business sites. www.centrica.com/report2009 The investors’ section of the website contains up-to-date information for shareholders including: • comprehensive share price information; • financial results; • dividend payment dates and amounts; • access to shareholder documents such as the Annual Report and Annual Review; and • Company issued share capital. Shareholders who have registered to receive shareholder documentation from Centrica electronically can: • view the Annual Report and Annual Review on the day they are published; • receive an email alert when shareholder documents are available; • cast their AGM vote electronically; and • manage their shareholding quickly and securely online. Visit www.centrica.com/shareholders for more information and to register for electronic shareholder communication. Centrica shareholder helpline Centrica’s shareholder register is maintained by Equiniti, which is responsible for making dividend payments and updating the register. If you have a query on the following: • transfer of shares; • change of name or address; • lost share certificates; • lost or out-of-date dividend cheques and payment of dividends into a bank or building society account; • death of the registered holder of shares; or any other query relating to your Centrica shareholding, please contact Equiniti: Telephone: 0871 384 2985* (overseas callers: +44 121 415 7061) Textphone: 0871 384 2255* Write to: Equiniti, Aspect House, Spencer Road, Lancing, West Sussex BN99 6DA, United Kingdom Email: [email protected] A range of answers to frequently asked questions is also available at www.centrica.com/shareholders.

162 Buying and selling shares in the UK – share certificates If you wish to buy or sell certificated Centrica shares, you will need Review – Business Report Directors’ to use a stockbroker or high street bank which trades on the London Stock Exchange. There are also many telephone and online

sharedealing services available. If you are selling, you will need The Centrica FlexiShare service to present your share certificate at the time of sale. FlexiShare is a ‘corporate nominee’, sponsored by Centrica and administered by Equiniti Financial Services Limited. It is a convenient Buying and selling shares – FlexiShare way to manage your Centrica shares without the need for a share Centrica has made arrangements at favourable commission rates certificate. Your share account details will be held on a separate with four independent share dealing service providers to allow you register and you will receive an annual confirmation statement. to buy and sell Centrica shares from your FlexiShare account. To buy or sell shares, please contact one of the share dealing providers. You By transferring your shares into FlexiShare you will benefit from: will need to quote the reference number provided on your FlexiShare • low-cost share dealing facilities provided by a panel of independent statement or dividend tax voucher. You should check the charges share dealing providers; with the broker before dealing. Shares held in FlexiShare cannot be • quicker settlement periods; sold directly through any other broker service.

• no share certificates to lose; and – Governance Report Directors’ The share dealing arrangements have been made with: • a dividend reinvestment plan – your cash dividend can be used to buy more Centrica shares (for a small dealing charge) which • Equiniti Financial Services Limited; are then credited to your FlexiShare account. • Halifax Share Dealing Limited; • NatWest Stockbrokers Limited; and Participants will have the same rights to attend and vote at general • WH Ireland Stockbrokers. meetings as all other shareholders. There is no charge for holding your shares in FlexiShare, nor for transferring in or out at any time. For further information, including the contact details of the share dealing service providers, a summary of dealing charges and terms For further details about FlexiShare, please call the Centrica and conditions that apply, please visit www.centrica.com/ shareholder helpline on 0871 384 2985* or visit shareholders. www.centrica.com/flexishare. Share price information Direct dividend payments As well as using the Centrica website to view details of the current Dividends can be paid automatically into your designated bank or and historical Centrica share price, shareholders can find share building society account. This service has a number of benefits: Financial Statements prices listed in most national newspapers. Ceefax and Teletext pages • there is no chance of the dividend cheque going missing in also display share prices that are updated regularly throughout the the post; trading day. For a real-time buying or selling price, you should contact • the dividend payment is received more quickly as the cash is paid a stockbroker. directly into the account on the payment date without the need to American Depositary Receipts pay in the cheque and then wait for it to clear; and Centrica has a Level 1 American Depositary Receipt (ADR) • a single consolidated tax voucher is issued at the end of each tax programme which trades under the symbol CPYYY. Centrica’s ADR year, in March, in time for the preparation of your self-assessment ratio is one ADR being equivalent to four UK ordinary shares. tax return.

For enquiries, please contact: Shareholder Information Direct dividend payment also helps Centrica improve its efficiency ADR Depositary by reducing postage and cheque clearance costs. To register for BNY Mellon Shareowner Services this service, please call the Centrica shareholder helpline on PO Box 358516 0871 384 2985* to request a direct dividend payment form, or Pittsburgh, PA 15252-8516 download it from our website at www.centrica.com/shareholders. Email: [email protected] Overseas dividend payments or via www.bnymellon.com/shareowner A service has been established to provide shareholders in over Telephone: 1 877 353 1154 toll-free in the US or +1 201 680 6825 30 countries with the opportunity to receive Centrica dividends in from outside the US. their local currency. For a small fixed fee, shareholders can have their dividends automatically converted from sterling and paid into Website address: www.adrbnymellon.com. their bank account, normally within five working days of the dividend ShareGift payment date. For further details, please contact the Centrica ShareGift (registered charity No. 1052686) is an independent charity overseas shareholder helpline on +44 121 415 7061. which provides a free service for shareholders wishing to dispose charitably of small parcels of shares, which would cost more to sell than they are worth. There are no capital gains tax implications (i.e. no gain or loss) on gifts of shares to charity and it is also possible to obtain income tax relief. Further information can be obtained at www.sharegift.org or from the Centrica shareholder helpline on 0871 384 2985*.

* Calls to these numbers are charged at 8 pence per minute from a BT landline. Other providers’ telephony costs may vary.

Centrica plc Annual Report and Accounts 2009 163 Shareholder Shareholder Information Information continued

Financial calendar 28 April 2010 Ex-dividend date for 2009 final dividend 30 April 2010 Record date for 2009 final dividend 10 May 2010 AGM, Queen Elizabeth II Conference Centre, London SW1 16 June 2010 Payment date for 2009 final dividend 28 July 2010 Announcement date for 2010 interim results 17 November 2010 Payment date for proposed 2010 interim dividend

Analysis of shareholders as at 31 December 2009

Distribution of shares by the type of shareholder Holdings Shares Nominees and institutional investors 13,023 4,769,377,307 Individuals 750,929 362,676,766 Total 763,952 5,132,054,073

Size of shareholding Number of holdings Shares 1–500 566,550 130,056,477 501–1,000 117,240 80,971,342 1,001–5,000 72,319 129,646,475 5,001–10,000 4,680 32,232,215 10,001– 50,000 1,913 34,228,169 50,001–100,000 198 14,650,198 100,001– 1,000,000 611 228,778,081 1,000,001 and above 441 4,481,491,116 Total 763,952 5,132,054,073

As at 31 December 2009 there were 78,061 participants in the Centrica FlexiShare service, with an aggregate shareholding of 130,313,446 shares, registered in the name of Equiniti Corporate Nominees Limited.

Useful historical information ordinary shares of 5 pence held on 7 May 1999. The consolidation Demerger was linked to the payment of a special dividend of 12 pence per The shares of Centrica plc were traded on the London Stock share on 23 June 1999; Exchange for the first time on 17 February 1997, the date of • on 25 October 2004, the ordinary share capital was consolidated demerger from British Gas plc. Shares were acquired in Centrica plc on the basis of nine new ordinary shares of 614⁄81 pence for every on the basis of one Centrica share for every British Gas share held ten ordinary shares of 55⁄9 pence held on 22 October 2004. The at demerger. The split between the post-demerger Centrica and consolidation was linked to the payment of a special dividend of British Gas shares was in the proportion Centrica 27.053% and 25 pence per share on 17 November 2004; and British Gas 72.947%. • on 31 October 2008, a Rights Issue was announced on the basis of three new ordinary shares for every eight existing shares held Shares in Centrica plc acquired on demerger are treated as having on 14 November 2008, at a subscription price of 160 pence per a base cost for capital gains tax purposes (calculated in accordance share. Dealing in the new fully paid ordinary shares commenced with taxation legislation) of 64.25 pence each. on the London Stock Exchange on 15 December 2008. Share capital consolidations and the 2008 Rights Issue Shareholders who subscribed for their rights in full should, for UK The share capital of Centrica plc was consolidated on two tax on chargeable gains (CGT) purposes, treat the existing and occasions, in 1999 and 2004, and in 2008 the Company offered new shares as the same asset acquired at the time of acquisition shareholders the right to subscribe for additional shares as set of their existing shares, and the subscription monies for the out below: new shares should be added to the base cost of their existing shareholding. Further tax information can be found in the Rights • on 10 May 1999, the ordinary share capital was consolidated on Issue prospectus on the Centrica website. the basis of nine new ordinary shares of 55⁄9 pence for every ten

Accessibility If you would like this Annual Report in an alternative format, such as large print, Braille or CD, you can request these in the following ways: Telephone: 0800 111 4371 Textphone: 18001 0800 111 4371 Please note that these numbers should be used to request copies of alternative formats only. For general shareholder enquiries, please use the shareholder helpline 0871 384 2985*. * Calls to this number are charged at 8 pence per minute from a BT landline. Other providers’ telephony costs may vary. 164 Directors’ Report – Business Review Directors’ Report – Governance Financial Statements Shareholder Information Communications. Communications. derivative 111-114 78, fair value 119-123 78, hedge accounting 114 78, analysis of shareholders 164 called up share capital 123-124 funds 158 44 shareholdings material prices 163 TSR (total shareholder return) 8 EPS (adjusted earnings 98-99 per share) 8, 27, employee 129-134 73, Executive 129-130, share-based payments 129-135 Financial instruments Financial Financial Review 27-28 IFC, Five-year record 160 Fixed fee service contracts 148 FSA (Financial Services 71 Authority) 24, 12, 30Fuel poverty 24, 12, Gas and liquids reserves 159 81, Gas Balancing Alerts 17 6, Gas exploration 14-15 6, 20 Gas production 14-15, 6, Generation Green 12 Goodwill and 100-105 other intangible 81, 76, assets 74, Green 24 Streets 12, Group Financial Statements 62-67 Health, safety and environment (HS&E) 32 25, 3, Income Statement 62 Interest 95 68-69 Standards Reporting Financial International Inventories 109 Joint ventures and associates 107-109 Key performance indicators (KPIs) 8-9, 22-26 Liquefied23 natural 15-16, gas (LNG)6, 30, 21-25, 13, 10, 4-7, carbon 2-3, Low Mature and orphaned 33 assets 14, 6, Microgeneration 29 22, 6, Minority interests 126 79 30, 32, 25, 23, 15, 9, Nuclear 4-7, 3, Outsourcingand offshoring 34 26, Pensions 33, 136-139 33 30, 31, 27-28, 23-24, 20, 18, Prices, wholesale 13-16, and retail 4-7, 2, Principal undertakings 150 Procurement 26 Property, plant and equipment 106 Provisions 118 Related party transactions 44 Renewables Obligation Certificate15 (ROC) 30 Renewables 15-16, 9, Reserves 20 14, 6, 5, 2, Rights Issue 27 Risk Management 29-34, 82-86 Segmental analysis 87-93 162 information Shareholder Shares schemes Shares Smart 31 29, meters 22, 5-6, 12, Statement of Changes in Equity 66 Strategic Priorities 5-7 3, Supply chain 26 Tangible fixed 155assets Taxation 96-97 payablesTrade 115 receivablesTrade 110-111 Vulnerable 30 customers 23-26, 12, This report hasand been printedfibre on Greencoatvirgin Free 80 Velvet, whichChlorine is madeTotal from 10% fibre, post-consumer recycled 80% independently been has paper This fibre. Free Chlorine Elemental 10% (FSC). Council Stewardship Forest the of rules the to according certified Designed and produced 35 by Wilson. Andy and Fawell Charlie by Photography certified FSC ISO14001, Ltd, Press Westerham Ives St by Printed CarbonNeutral®. and Index re-appointment 44 remuneration 97 report the to members of Centrica plc 60, 151 Company, notes 152-158 Group 64 80 75, 30, 31, North America 19 18, 30 5, UK 2, NPS (net promoter 24 score) 12, 9, 18-19 numbers 10-13, 34 30, 32, 23-24, service 10-13, 36-37, biographies indemnities 39, directors’ disclosure of information auditors to 43 emoluments 53, 95 pensions 58 38-39 re-election remuneration policy 47-54 43 responsibilitystatement service contracts 52 54-58 share interests 47-51, training 39 costs 95 25-26 engagement 12, 10, 9, 95, 25, 13, numberIFC, pensions 76 25-26 policies Accounting policies 68-82, 28, 153-154 139-142 74, Acquisitions, 70-71, 28, 14, business12, combinations 11, 4, 2, Alternative Formats 164 Assets and liabilities 64, 160 27, Auditors 26 25, Awards 12, 5, Sheet Balance Board of Directors 36-37 2-3, Borrowings, bank overdrafts, loans and others 116 31 29, 26, 24-25, 22, British Gas 4-6, 10-13, 2, 9, Business principles 32 26, 22, 3, Capital Management 87 28, 21-25, 15, 13, 10, 9, 4-7, 2, emissions, low Carbonintensity, Cash and cash equivalents 115 160 127-128, Cash 67, Flow Statement 27, CCGT (combined cycle gas turbine) 15 5, 23 Centrica Energy 14-16, 5, 2, 23 Centrica Storage 17, 6, 5, CERT (Carbon Emissions Reduction scheme) Target 73 22, Chairman’s Statement 2-3 44 26, donations political and Charitable Chief Executive’s Review 4-7 Climate 30 29, change 22-23, 9, 4, Combined code on corporate governance 38-43 Commitments, contingencies and indemnities 145-147 40-42 Committees 36-37, 21-22, 26 Communities 24, 21, 3, Competition operationsContinuing93 Corporate governance 36-43 32 21-26, responsibility Corporate Cost of sales 72 44 policy payment Creditor Customers Deferred corporation tax liabilities and assets 117 33 Direct 24-25, 22, Energy 18-20, 5, 2, Directors 97 8, 2, DividendsIFC, 29-34 Electricity 27, 21-23, 20, generation 5-6, 4, 15-16, 9, 162-163 Electroniccommunications IFC, 32 24-26, 21, Employees 10-12, 9, 3, ChainIFC EnergyValue 29-3126, 24, 22, 20, Energy efficiency12-13, 4-5, Energy 24 Ombudsman 11, Europe 30, 4-5, 143-144 29, Events after the Balance Sheet date 149 28, Exceptional items and certain re-measurements 94 27, Executive team 37 Financial calendar 164

‡ *

7 18 27 94 34 £m 147 147 (93) 183 168 233 595 444 profit Operating ‡

41 £m 551 196 567 406 1,150 7,843 ‡ 3,316 1,352 2,491 1,406 2,644 80% Revenue

15% 4%

£661m

12.80 £(136m) Ω £2,003m £20.87bn

09 12.20

08 11.57

07 9.92

06 9.35 33% 2009 21.7p 16.5p 12.8p 05 Dividend per share pence £856m £1,111m £1,175m £1,857m £21.96bn

21,963 09

‡ 20,872

08 15,893

07 16,065 06

13,274 ^ Group revenue £m 05

‡

* 1,111

911 ^‡

includes net exceptional charges £nil) £568m of (2008: ‡ ‡

08 1,122

07 ‡ ^ 707

AnnualReport Accounts and 2009